Optimism, we're told, is at an all-time high in the world of small to midsize companies, thanks in no small measure to President Trump's tax cuts and deregulation. But his trade policies are already threatening to put a damper on the good mood. His China tariffs, especially, are jacking up the costs of the thousands of U.S. businesses with Chinese suppliers. One such business is owned by my friend, Ryan Zagata, founder and president of Brooklyn Bicycle Co. We hadn't talked in more than a year when he called me out of the blue this fall and asked if we could have lunch. I readily agreed.
Brooklyn Bicycle, with slightly less than $2 million in annual sales, is known for the innovative designs and craftsmanship of its bikes, one of which was selected by the Museum of Modern Art to be sold through its gift shop. They are manufactured in China using parts from five or six countries, mostly in Asia. Over lunch, Ryan told me that, although the business was doing well, he had questions about what to do if Trump carried through on his threat to add $200 billion in new tariffs on Chinese imports, which he did in September, and which includes an additional duty of up to 25 percent on bicycles and bicycle parts. Ryan was already paying a duty of 5.5 percent. An increase to 30.5 percent would force him to make some tough decisions.
One possibility would be to simply absorb the additional cost. On a typical bicycle costing him $200 to manufacture, he would have to pay an import duty of $61, as opposed to the $11 he was paying currently. That would be a $50 increase in the bicycle's cost of goods sold and an equivalent decrease in the gross profit it generated.
Alternatively, he could ask his customers to cover the increase and raise the bike's price by $50. But the bicycle market is very competitive. Ryan couldn't be sure what effect the price increase would have on his sales. So maybe, I told him, he should do some combination of the two, raising prices by a smaller amount--say, $10 or $15--and absorbing the rest.
Or maybe he should move production to another country, such as Vietnam? "That's not as easy as it sounds," he said. "To begin with, it's not worth doing unless the cost savings is going to be more than $50 per bicycle. Not to mention the R&D and travel costs of sourcing a new factory, and having samples made and tested. Every bike model we bring into this country from a new supplier we have to send to the Consumer Product Safety Commission for testing. So moving production to another country would be a big effort with a lot of costs we would never recover. There's also a risk if you've built your reputation, as we have, working with one or two suppliers. Will a new manufacturer understand what we're looking for and give us the same level of quality?"
What about manufacturing domestically? "For us, it's the same problem," he said. "There's nobody in the United States making rims, hubs, spokes, saddles, chains, drivetrains--all the things we'd need, in the quantities we'd need them. We'd have to import the components, and they're subject to the same tariff as the bicycles themselves."
Ryan could see no simple solution to the problems he'd face if the 25 percent tariff was imposed, and I couldn't either. I asked what he planned to do. "I'll watch my competitors," he said. Meanwhile, he was taking a closer look at each of the possible options, "making sure we're dotting all the i's and crossing all the t's," as he put it, so he would have all the information he would need if he did have to make a decision.
No doubt thousands of small to midsize companies are struggling with similar issues because of Trump's trade wars. (The U.S. president has further suggested adding tariffs to the remaining $267 billion of Chinese imports if the talks with China President Xi Jinping, which are scheduled for later this month, fail.) I'm glad to see that major business organizations have finally begun to raise a stink about them. Let's just hope they can get him to end the tariff war sooner rather than later.