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Core Bank Clients Set to Feel Tariff Sting

Core Bank Clients Set to Feel Tariff Sting

(6 Aug 2018 - United States) Although the impact on banks is not yet discernible the Trump administration’s tariffs on steel and other imports is expected to harm middle market and small businesses that make up most US commercial borrowers.

President Trump’s 25 percent tariffs on steel that took effect in the last three months and recent threats to impose additional tariffs on other goods from China have led many of US corporates to issue warnings about how their operations will be affected. Heavy equipment manufacturer Caterpillar, for example, said on July 30 that its costs will rise by US$200 million in H2 2018. Most regional and community banks do not provide financing to companies of that size, but they have vast exposure to their suppliers and vendors, several lenders and analysts said, highlighting the ‘knock on’ effect of taxing the international trade of goods and services. Those banking clients include trucking and transportation companies, distributors and the manufacturers of parts used in larger products. The most vulnerable are suppliers or vendors to companies that import raw materials from China and derive most of their sales in the US because they would pay the tariff on Chinese imports, which could be 10 to 25 percent, depending on what the White House decides.

Just over ten percent of apparel and textiles sold in the US are imported from China according to 2016 data compiled by the US International Trade Commission. About 39 percent of electronic products are imported from China, the largest of any category. The automotive industry fiercely opposes the Trump administration’s tariff strategy because vehicles are manufactured using parts made all over the world. General Motors lowered its earnings forecast for 2018 due to the steel and aluminum tariffs and warned it may cut FTE. And the auto parts maker Cummins lowered its forecast for cash flow by US$100 million for H2 2018. “Tariffs on vehicles and a broad spectrum of Chinese products would be significant and could push suppliers in the vehicle industry to the brink,” said Diane Swonk, chief economist at Grant Thornton.

Construction projects may also slow, as costs for steel and other supplies rise, said Mike Maddox, CEO at CrossFirst Bank. “With the potential increase in prices on raw materials, that could have an impact. You’re doing a big development project with a lot of structural steel involved; that could have a substantial change in costs.” Meanwhile, most bank executives seem to share the opinion of JPMorgan CFO Marianne Lake, who said that tariffs are an unwelcome variable, but not an immediate concern. “Trade is firmly part of the risk narrative … but it is not at this point causing clients to change strategic actions. But it is important that that uncertainty is taken off the table. But that view is almost certain to change over time, if Trump and China continue to engage in tit-fot-tat policies on trade. Tariffs are corrosive, not cataclysmic, at the moment. They are squeezing margins and forcing more large companies to pass along the increased taxes as price hikes. The economy is currently strong enough to do that.”

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