Trapped in tariffs, firms tied to lobster industry look for way out

A gritty gray mist rises from the ground floor of Riverdale Mills interrupted by explosions of color: yellow, reds, and blues – as if someone had tried to merge this Northbridge, Massachusetts, steel-mesh maker with pieces of a Crayola factory.

This is America’s biggest producer of lobster traps and crab pots, with their colorful PVC coatings to protect them from the seawater, but CEO James Knott Jr. has seen his profit margins and his employee base dwindle over the past nine months because of U.S. steel tariffs.

“My main competitors are out of China and the EU and they don’t have any tariffs,” he says. “We get out of line with the world market and we are in trouble.”

Tariffs are key to President Donald Trump’s trade strategy. The administration has used them to help out domestic producers of everything from steel to washing machines and solar panels. And it has used tariffs on all manner of Chinese goods to prod Beijing to the negotiation table. But it’s now becoming clear that tariffs represent more than a negotiating tool for the administration. Reports suggest the U.S. wants to use them as a permanent enforcement mechanism in any China trade deal, under which Washington could reimpose them if it judged that Beijing was not living up to its end of the bargain and Beijing would not be able to retaliate.

The lobster industry, which has experienced a rare triple whammy of tariff hits, is a peek at how this new world might work.

For all the hoopla by Trump trade supporters and detractors, the impact of tariffs on a large and domestically based economy like the United States is more whimper than bang. Even as the effect is very sizable for some industries and firms, it’s not very visible as a factor in the overall economy.

“It’s not large,” says Patrick Kennedy, co-author of a March study on the effects of tariffs on the U.S. economy.

The benefits are small. For example, the U.S. steel industry has begun to reopen plants and add workers since President Trump announced a heavy 25 percent tariff on imported steel a year ago and extended those tariffs to Canada, Mexico, and the European Union (EU) in June. But the extra 7,000 jobs – a little less than 2 percent of the industry’s workforce – hardly represent a renaissance.

So are the costs, by some measures. Mr. Kennedy and his co-authors of the National Bureau of Economic Research study found that the net impact of the Trump tariffs – the better sales and profits for domestic producers and increased government revenue minus the higher costs for steel users and other consumers – represents a very small drag on the economy: $7.8 billion. That is a minuscule 0.04 percent of the U.S. economy as measured by gross domestic product. A February survey of business economists found that if tariffs persist in 2019, more than half the economists believed the drag would be larger, lopping a quarter or half a percentage point from GDP growth.

What’s changed are the winners and losers, which are based increasingly on nationality rather than efficiency or business savvy.

As a steel buyer, Mr. Knott is clearly on the wrong side of the divide. Riverdale produces a wide range of products from birdcages to farm barriers to high-security fencing. When the president extended his steel tariffs to include Canada (as well as Mexico and the EU) in June, Mr. Knott saw steel prices rise across the board. His shipping costs soared, too, since steel mills in Canada are closer to him than ones in Texas or North Carolina.

Since then, prices have moderated, but he remains cautious. He’s experimented with raising prices in selective markets, and through attrition has reduced his workforce from 200 to 150. Since the tariffs, he’s also seen longtime clients hedge their bets, splitting their orders between his company and EU competitors. “There’s a lot of uncertainty,” he says.

So what happens if the threat of tariffs becomes a permanent part of a U.S.-China trade agreement? Will that cause ongoing uncertainty among Chinese buyers of U.S. products?

As it happens, the other end of the lobster business has also been hit by two waves of tariffs. The U.S. industry has been on a tear in the past decade, with both the size and value of the catch nearly doubling since 2008. But in the fall of 2017, Canada and the EU provisionally implemented the Comprehensive Economic and Trade Agreement (CETA), which immediately eliminated the EU’s 8 percent tariff on Canadian live lobster, while the tariff remains for U.S. lobster.

To compensate, the Americans, who so far have gotten nowhere with the EU, worked hard to expand markets in Singapore, South Korea, and especially China. Exports to China more than doubled in the first half of 2018 compared with the same period a year earlier. Then on June 15, the industry learned that in response to Mr. Trump’s tariffs on China, China would retaliate with a 25 percent tariff on various seafood, including lobster.

“I’ve had one company say that they lost – I mean overnight lost – like 100 percent of their exports to China,” says Annie Tselikis, executive director of the Maine Lobster Dealers’ Association. “Others lost 80 to 90 percent. It’s just it’s been a really, really challenging time for these businesses.”

And outside of working to develop new markets, there’s little the suppliers can do. “Being caught in the crosshairs of a dispute around intellectual property when you’re a food business ... it seems nonsensical,” says Ms. Tselikis.

Ironically, the tariffs have not hurt U.S. lobstermen so far. They’re struggling with environmental challenges this year, but demand is so strong that they should be able to sell all that they catch, no matter who eventually packs, processes, or ships their product. The clear winners of the lobster tariff wars are the Canadian dealers.

“Right now, everything is as good as it can be,” says Leo Muise, executive director of the Nova Scotia Seafood Alliance, which represents over 80 seafood suppliers in Canada’s eastern province. “If the U.S. and China get rid of the tariffs, it’ll have an impact, but I don’t expect the effect to be big.”

Mr. Knott, the lobster-trap maker, is a clear loser. And so are Chinese consumers.

After Chinese countertariffs went into effect last year, imports from the the U.S. dried up and the price of Canadian live lobsters almost doubled, says Liu Gang, a Chinese buyer for the Shanghai Yifeng Food Co., who was attending the Seafood Expo North America in Boston on Monday. Last year, all but one Chinese importer of live lobsters recorded a loss in revenue, he adds.

If you’ve followed the trail to here, then you know tariffs rearrange the competitive landscape. They can give domestic producers some help. But consumers of the countries that impose tariffs often see higher prices, whether they’re buying U.S.-made steel or a North American seafood delicacy in a restaurant in Shanghai.