The impact of trade tariffs on two US firms

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Caterpillar says higher prices will offset expenses tied to new trade tariffs

New trade tariffs are raising costs for US businesses, testing their power to pass on the expenses to consumers.

US equipment maker Caterpillar on Monday said strong demand had allowed it to hike prices to offset $100m-$200m in higher steel and aluminium costs.

But while higher prices are shielding some firms, others are under strain.

On the same day, food processor Tyson Foods cut its profit forecast, saying retaliatory duties on US pork and beef exports had lowered US meat prices.

It said it expects adjusted earnings per share in the range of $5.70-$6 for its 2018 financial year due to a surplus in US supply caused by the tariffs. That was down from its earlier $6.55-$6.70 forecast.

Lower prices for beef and pork have also reduced demand for chicken, the firm added.

“The combination of changing global trade policies here and abroad, and the uncertainty of any resolution, have created a challenging market environment of increased volatility, lower prices and oversupply of protein,” said Tom Hayes, Tyson Foods president and chief executive officer.

The updates were the latest from businesses explaining how trade disputes are raising costs and shifting demand for products that range from cars to beer.

Passing the cost?

In March, the US announced tariffs on steel and aluminium, prompting China, the European Union, Mexico and other places to retaliate with import taxes on US products such as pork, wine and whiskey.

Separately, the US and China have also imposed tit-for-tat tariffs of $34bn on the other country’s goods, in a row over intellectual property practices and state subsidies.

While some firms, including Caterpillar, have said they will pass on higher costs to consumers in the form of higher prices, others are more constrained.

BMW, for example, has said it would raise prices in China by 4%-7% on two SUV models, which are US-made. But the rise will not completely absorb the cost of China’s new taxes on US vehicles, the firm warned.

Harley Davidson told investors it plans to shoulder the cost of European tariffs on US-made motorcycles in order to remain competitive. It is also grappling with higher steel and aluminium prices.

Inflationary pressure

Overall, analysts expect the duties to have a relatively modest impact.

Analysts at US bank Wells Fargo estimate that the US tariffs so far will boost inflation in the US by 0.1%, but said that the rise could be softened by price declines for products targeted by other countries for retaliation.

The changes come as higher fuel and labour costs fuel stronger inflation in the US.

The index for producer prices climbed 3.4% over the 12 months to July, the strongest annual gain since November 2011, according to figures from the US Labor Department.

The consumer price index increased 2.9% over the 12 months to June.

With wage growth still relatively slow, economists say it’s not clear how many increases households can handle before they reduce spending.

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