An executive from Pennsylvania lighting technology giant Lutron Electronics says Chinese customs policies are turning the U.S.-China trade war into a scrappy knife fight aimed at incapacitating American businesses trying to supply critical energy infrastructure and components to the Chinese economy.
“China customs is holding our products and has taken a firm stand and said, ‘No they’re not allowed in,’” said Pekka Hakkarainen, vice president of Lutron. “This is a little bit new.”
After a nearly seven-month investigation into China’s potentially unfair trade practices in 2017, President Trump announced in March 2018 that the U.S. would address the issue with three tactics—tariffs, a World Trade Organization dispute settlement process, and investment restrictions. The most controversial of the three has been the tariffs.
Since last March, the Trump administration has imposed tariffs on $250 billion worth of Chinese imports into the U.S. across various industries. China has retaliated with tariffs on $110 billion on U.S. goods going into its market.
Hakkarainen and his global lighting company, Lutron, have been caught in the crossfire.
Lutron manufactures lighting technology for high-end commercial and residential buildings, things like dimmers and switches, and they’ve been suppliers to China for years. But Lutron also buys component parts for its technology from Chinese manufacturers, whose parts have gotten more expensive since the U.S. imposed component tariffs on Chinese goods last summer.
“In an industry where the supply chain is very global in nature, and a lot of it is concentrated in China, we’re caught between a rock and hard place,” Hakkarainen said.
China’s Certification and Accreditation Administration (CNCA) is China’s regulatory body which has stopped and stored Lutron components at the border. CNCA told Lutron the components don’t have a “Triple C” safety mark on them.
But that is a new requirement in the new U.S-China trade war, Hakkarainen said. And there’s no way for Lutron to get the rating.
“The agency in charge of the safety marking says we cannot get that mark because those particular products [lighting system components] are not in the scope of the equipment that requires the marking,” Hakkarainen said.
CNCA is the government agency responsible for safety markings. But a Chinese government testing laboratory actually issues the markings for any product that is tested and passes regulation.
“How they split their duties is not entirely clear to me,” Hakkarainen said. “Two China agencies are not talking to each other, and we’re trying to facilitate how we might get them to resolve this and communicate.”
Lutron was advised by some Chinese contacts to ask the CNCA to write a letter to the laboratory for the safety marking, but the CNCA asked the U.S. company to pay it $15,000 to make the request to the lab.
“We elected not to go that route,” Hakkarainen said.
Robert Amsterdam, founder of international law firm Amsterdam & Partners and expert on China, said this is not your run-of-the-mill trade war, but it’s not just the tariffs either.
When Canadian officials arrested Meng Wanzhou, a high-profile Chinese executive and daughter of a Chinese tech giant, the trade war got personal, he said.
She was arrested the same night President Trump and China’s President Xi Jinping met for dinner during the G-20 talks in Argentina when the two leaders called the 3-month truce on escalating trade tensions.
“The arrest of [Wanzhou] changed the dynamics of the dispute,” Amsterdam said. It became personal to the Chinese leadership, he said.
“The Chinese are reciprocating this treatment,” Amsterdam said. “It becomes more arbitrary at the borders.”
Dan Eberhart, CEO of Denver-based Canary, an oilfield services company that relies on Chinese manufacturing for his wellheads, drill bits and drill string pipe, said he’s feeling the tensions too.
“It’s not just the tariffs, but it’s also about supply chain, capital investment and uncertainty,” Eberhart said.
“Are we done raising tariffs or not? Is the truce going to hold? Is there going to be a deal?”
Eberhart said producers and oilfield services companies like his are concerned about whether shipments will arrive in the U.S. regularly, and they wonder what the pricing should be.
“Do we communicate the tariff price increase to our customers and take that hit, do we absorb it, is it going to get worse?” Eberhart said.
Shipping frequency is reduced while the timeline has been stretched, he said.
“China is prioritizing shipments to other parts of the world out of Shanghai. We’re having trouble getting placements on fast boats. Those have been redirected to Europe and the Middle East,” Eberhart said.
Waivers Offer Little Comfort
Eberhart has no faith in the waiver process. He calls the exemption application “a release valve for people that are frustrated.”
Lutron has applied for waivers; the U.S. Trade Representative said Lutron did not demonstrate sufficient economic hardship.
“I’m personally pessimistic because the record shows no one yet has received any relief,” Hakkarainen said, adding that he applied again in December 2018.
The Commerce Department, which handles steel and aluminum waiver applications, told CNBC and others they were overwhelmed by the number of applicants.
Commerce has received more than 47,000 steel and aluminum waiver requests but has issued decisions on 16,500. Commerce hired 70 contractors to process the applications.
In July, USTR imposed additional tariffs of 25% percent on a variety of Chinese products totaling about $34 billion. USTR said the tariff lines contain products identified as benefiting from China’s industrial policies, including the “Made in China 2025” program.
Last fall, the USTR stopped accepting waiver requests on $34 billion in Chinese goods. About 7,000 petitions have been submitted. USTR has denied about 670.
The Options Are Difficult
Lutron is considering other options to maintain its market share. But getting a Chinese supplier to move is not easy, Hakkarainen said, and finding other suppliers in the electrical industry is not expeditious.
The company has considered dividing its manufacturing between the U.S. and Mexico and taking China out of the equation.
“How long [the U.S.-China trade war] will last is causing decision-making to be very difficult,” Hakkarainen said.
“If we knew that tariffs are going to be in place for 10 years, we would certainly not like that, and the industry is generally for free trade than for tariff or technical barriers to trade, but it would still be, from the viewpoint of making decisions, it would be easier to deal with,” he said.
Putting Investments on Hold
“In 2019, we anticipate that [tariffs] are going to be a full year worth of additional expense. And it’s significantly greater than the tax cut that we got in the Tax Cuts and Jobs Act in 2017,” Hakkarainen said. “We won’t be closing down, but it’s putting investment ideas on hold.”
Lutron has spent thousands of dollars and billable hours applying for exemptions to component tariffs on Chinese projects coming into the U.S. that are essential to Lutron’s commercial and residential lighting technology. “It’s distracting fairly senior people in the company from what they would normally be doing. It’s a lost opportunity to do something better,” Hakkarainen said.
The Trump administration was expected to increase tariffs on $200 billion of Chinese goods from 10% to 25% on Jan. 1, but Trump and Xi Jinping agreed at the G-20 meeting in Argentina in December to a 90-day respite from escalating tariffs that have already totaled into the billions of dollars across all industries.
Josh Zive, energy and international trade law and lobbying expert at Bracewell, said the tariffs have certainly harmed the energy industry. On the infrastructure side, the lead time to buy steel has gotten longer, and costs have gone up.
Projects are more expensive, and “more recently, that’s combined with the government shutdown which has slowed down review of inbound foreign investment,” Zive said.
Zive said tariffs don’t benefit the US energy sector because the sector is “materials intensive and relies heavily on a global supply chain.”
“Trade wars complicate energy companies’ ability to do sourcing and supply and sell into foreign markets,” Zive said.