The U.S.-China trade war has had a significant impact on domestic industries over the last year, accelerating the contraction of U.S. manufacturing and causing significant disruption for multinational corporations and small businesses, particularly farmers.
The agricultural sector has taken a heavy beating as China is the top market for a variety of U.S. farm exports from soybeans to lobster.
Tariffs and an unpredictable trade environment have been particularly hard on nut farmers, Richard Cabrera, EVP of commercial and corporate banking at Umpqua Bank, told Supply Chain Dive.
"Most of their output went into China, and that got slapped with a pretty heavy tariff," Cabrera said.
Sixty-two percent of middle market companies have been affected by the U.S.-China trade war and associated tariffs, according to a survey of 550 middle market companies prepared and conducted by DHM Research for Umpqua Bank, forcing them to search for new markets or delay expansion plans overseas.
"More than 7 in 10 middle-market companies are uncertain about the future of their business due to the US/China trade dispute, with nearly 2 in 10 reporting high levels of uncertainty," the report found.
Dale Darling, founder and president of Summit Premium Tree Nuts has made upwards of 25 trips to China throughout his career, building relationships with buyers in the almond market, he told Supply Chain Dive. His company moves $500 million to $700 million worth of nuts to over 65 countries each year. Until the trade war began, China had been its single largest market, representing 8% to 10% of its total business.
China's retaliatory tariffs on agricultural goods meant "the tax rate on almonds went from a 10% rate up to 50%," Darling said. "Hazelnuts went from approximately 25% up to 50%. Pistachios went from 5% to 50% and pecans went from 7% to 50% as well."
"The hard reality is that when you're a mid-market business and you have limited resources and everything is working and you're making good margin, then you don't [think you] have to change. You only change under pain."
Richard Cabrera
EVP of commercial and corporate banking at Umpqua Bank
As a result, Chinese buyers switched from sourcing almonds from California (which produces 80% of the world's supply) to buying from Australia, which has a 0% tariff, Darling said. For his business, this meant identifying other international markets to make up the shortfall.
As Australia was increasing its sales to China, it opened up opportunities for American almond sales in Europe, India and the Middle East.
"At the end of the day," Darling said, "our business in almonds is going to be equal, no real change, and I don't think it impacts the California growers dramatically on pricing," as they've been able to recoup marketshare elsewhere. He also credited changing eating habits worldwide that favor plant-based milks and snacks, particularly in emerging markets where middle-class incomes are increasing and interest in these types of products is growing.
Summit's other lines of business in the pecan and hazelnut markets have not been as fortunate, as there are fewer alternative markets, and prices and volumes have decreased between 10% and 20% in each category respectively.
"Our volumes into China have decreased but ... our total volumes actually were up 18% overall for all our nuts this past year so you can say that our Chinese business went down, but our other areas more than made up for it," Darling said.
This is a growing tariff mitigation trend among middle-market businesses, Cabrera said, though it, "underscores a fundamental weakness and flaw in the strategy."
"We all know that diversification is the right way to go," he said. "You don't want all of your eggs in one basket. But the hard reality is that when you're a mid-market business and you have limited resources and everything is working and you're making good margins, then you don't [think you] have to change. You only change under pain."
For some firms, this pain came in the form of a "catastrophic" hit to revenue that "just went away," according to Cabrera, as agricultural businesses mistakenly thought early on the trade war would have a minimal impact.
For large, multinational corporations, time and resources are often on their side. "Once the word gets out that we have potential tariffs, people go into motion in larger companies and start planning and figuring out 'Okay well where's our next move going to be? ... how do we allocate resources in order to transition?' For a middle-market company none of that exists," Cabrera said.
Among the firms looking to diversify, the bank's survey found over half are exploring Europe, in addition to Latin America and the Asian Pacific. Thirty-seven percent are trying domestic markets, however only 3% of firms with off-shore operations said they are considering returning to the U.S.
