The opening salvos in a trade war initiated by the current U.S. administration are already having an impact on all the manufacturing sectors in Canada, the U.S and around the world, most of it negative.
For example, it’s been announced that Harley Davidson, that icon of U.S. brands, feels it’s necessary to move some of its U.S.-based production to Europe to avoid countervailing duties leveled against the U.S. by the EU — a move which has drawn public criticism from the U.S. president via his usual medium, Twitter.
So, how has that general upheaval in the order of things affected ag equipment manufacturers in Canada? CG caught up with Leah Olson, president of the Agricultural Manufacturers of Canada (AMC), at Canada’s Farm Progress Show in Regina in June and asked her what the association’s members are saying. Here’s how the conversation went.
Q. What is the ag equipment industry saying about the steel and aluminum tariffs?
A. We’re very concerned. The repercussions of that on the industry are price increases. Some of the ag equipment manufacturers in Canada have longer-term contracts, so they can continue to have those (steel prices) respected. But for those that don’t, they’ve started to try and increase their inventory. With supply and demand, steel prices are going up. We anticipate prices won’t necessarily hit all farm equipment and farmers in the same way. Some manufacturers are looking at ways they can contain costs so they are cushioning farmers from higher prices. For others, that may not be possible.
At this time what AMC is doing is talking to the Canadian government. We continue to encourage them to avoid tariffs. We don’t believe that any form of protectionism will help consumers or the ag industry. We believe that at a time like this, particularly for the U.S. ag industry, this will hit them hard. We have been working with AEM (The Association of Equipment Manufacturers) to ensure that our voices on both sides of the border are heard. Our key messages are very consistent.
As soon as Trump announced his intention to introduce tariffs, there were already reports of rising steel prices. Is that what manufacturers have seen?
There’s been a lot of business uncertainty as a result of what’s been talked about at the political level. Business enjoys knowing what the rules are and when they’re going to be enforced. So in early March when the administration originally announced the tariffs, that caused mayhem. Canada and Mexico were exempted, and we were grateful for that, but the damage to business confidence was already done. So from that perspective steel and aluminum manufacturers were already preparing for something that was going to happen. I think right now we’re seeing a lot of speculation and a lot of hope that tariffs will not be put into place permanently. But that unknown is what’s hurting our members and hindering their abilities to make decisions on how much steel do they buy, what is the price they’re buying at and looking at other input costs, because steel is only one element of inputs to farm equipment. They are looking at other elements they could change and cushion the price (increase) to the end user.
Is this also affecting manufacturers’ willingness to invest in facilities or make other capital investments? Are plans being put on hold, because of the tariffs?
I think for manufacturers that were looking at big capital expenditures, those decisions have been put on hold or on ice for the time being, just to see where all this is going to end up. That said, many of our manufacturers have increased their employment, they are investing. This is at a time when we’re seeing some real optimism in the industry. But the actions of the U.S. administration and the Canadian government’s quick and timely response add a bit of uncertainty. Overall, though, I think the industry will continue growing. And our hope is this will be a short-term blip. But that’s not something we can control.
Given that China, a major buyer of U.S. agricultural commodities, has announced retaliatory duties on products that could affect the pocketbooks of American farmers, is there actually a possibility the equipment industry could be looking at a downturn if tariffs remain in place?
If tariffs become permanent, one of the first industries to be hit will be the farm equipment manufacturing industry in both Canada and the U.S. We’re not the big auto industry that has had a lot of experience with the government in terms of subsidies. Our industry tends to be located in smaller, rural areas and we’re very export oriented, with the U.S. being a big market. If U.S. farmers are not able to invest in new equipment, then yes. We will see our profitability and sales go down. There are lots of opportunities in other markets, but my worry is if tariffs become permanent, is the industry that will be hit the most is the farm equipment manufacturing industry in Canada and the U.S.
Do manufacturers have any idea yet how much prices will rise based on what they are paying for steel and aluminum now?
It really is dependent on the size of the manufacturer and their relationship with the steel producers. In Ontario, manufacturers there have seen and felt their prices go up quite a bit quicker and more drastically than those in Western Canada. I think that’s just because of the relationship they have with producers. That said, we realize farmers are our customers and prices of farm equipment have already been rising because of R+D, testing and new product development, and the industry, writ large, will be looking at ways they can cushion the farmer. But we realize there will be instances where that’s not possible.
I know one of the major brands had already announced price increases in early June. That was on a Monday. Then the administration announced the tariffs and Canada gave their timely response as well. That was on the Thursday. So we’re already seeing price increases that have nothing to do with the tariffs from some of the mainlines.
People generally support our federal government’s response to the U.S. tariffs by imposing countervailing duties, but in a practical sense, will that also serve to push up manufacturers’ costs?
I think the Canadian government was put in a very awkward position. They had to respond. Our industry believes trade can and should be happening. It helps the agriculture industry, therefore it helps consumers. Concerning the counter tariffs the Canadian government put in place, we applaud the speed of their response, and we are encouraging them to get back to that NAFTA table and talk to the U.S. administration in the way that they have been and try and get those tariffs eliminated.
Are there opportunities to source inputs from Canadian steel suppliers and avoid tariffs?
Our supply chains are very intertwined between Canada and the U.S., whether you’re in western Canada, Quebec or Ontario, the supply chains are tight. So it’s hard to determine if tariffs are going to hurt Canada more or the U.S. Because some of our members in the U.S. are buying steel from Canadian producers, they’re going to get hit. If it comes back to Canada as an unfinished good, it comes back at a higher price. Ag equipment has flowed back and forth without tariffs. So this is the first time many of our members have had to deal with them.
If there was an understanding of how intertwined the industry is, perhaps those (tariff) decisions wouldn’t have been made. But it will hurt.
Previously, some manufacturers have dealt with rising steel prices through the use of a surcharge added to the MSRP. Is that a possibility going forward?
I haven’t heard of that being discussed. Manufacturers are trying to be transparent about what’s happening in their industry. So when you have a major input cost and it is 100 percent out of your control, you have to take that somewhere. So I would anticipate some of our members may be contemplating that. The ideal situation would be that in the next week everyone realizes no one is going to gain from tariffs and everyone comes back to the table.
Are there other markets that can replace any slump in demand from U.S. buyers?
We are an export industry; in 2017 Canadian ag implement manufacturers exported over $1.9 billion in implements to 154 countries. We are a very diverse industry but our exports to the U.S. make up around 77 or 78 per cent. So there’s no doubt that is the first market manufacturers will dip their toe in. But at the same time we encourage Canada to pursue trade agreements, to pursue a free trade agreement with China. Australia is still a good market for our industry. In Kazakhstan, there’s strong demand there for our products. So diversity is going to be important for our industry.
AMC has been working with the U.S.-based AEM to lobby for a return to normal trade, is there optimism that message will be heard in the right circles in the U.S.?
I think the key message is we’ll control what we can, but those things we can’t we’re not going to speculate on. So from that perspective, when we encourage the Canadian government to get back to the table, the real message is all this craziness over tariffs is causing uncertainty. So we’re not sure where, when and how to invest, when, where and how to employ more people. So the sentiment is there’s concern. But if it’s going to continue, it’s going to continue and we’ll operate our businesses accordingly. And I think the repercussions on the farm industry in both Canada and the U.S. was quite underestimated. This will hit our farming industry very heavily if it proceeds.