Strategic Exchange: The LVT category is caught in a trade debate - Aug/Sep 18

By Kemp Harr

Summer is over, the kids are back in school, and the fall selling season at retail has begun. The latest data from the National Retail Federation says that spending at retailers-excluding car dealers, gas stations and restaurants-is predicted to climb at least 4.5% for 2018. Higher wages, gains in disposable income, a strong job market and record-high household wealth have all set the stage for robust growth in the nation’s consumer-driven economy.

The only two wildcards to this forecast are uncertainty surrounding the Chinese trade war and higher-than-expected inflation due, in part, to increased oil prices.

In a recent conversation I had with Charlie Dilks, the chief product officer with CCA Global, he told me that he had heard the industry was up roughly 4% to 5%, and Carpet One is up 7% for the year. He attributed some of those gains to the rapid growth of LVT.

THE CHINESE TARIFF DEBATE
The debate over tariffs here in the U.S. dates back to the Boston Tea Party when the colonists were upset over having to pay a tax on British tea. In the early days of U.S. history, tariffs were a common practice. In fact, prior to the 16th amendment in 1913 that legalized income taxes, import tariffs were the primary source of funding for the federal government. The first big movement away from the use of tariffs in the U.S. started in 1947 after World War II with the General Agreement on Tariffs and Trade (GATT), which was designed to liberalize trade among all capitalist countries. In 1995, GATT became the World Trade Organization (WTO), and in 2000, China joined the WTO. In 2015, China overtook Canada as the U.S.’ largest trading partner.

As with any debate, there are two schools of thought. Those in favor feel that a tax on imports protects domestic manufacturers from foreign competition, enabling them to hire domestic workers. And those against tariffs believe that an open market encourages fair trade where innovation becomes the deciding factor in the selection process. In fact, those on the open market side of the debate feel that tariffs breed incompetence. Why should a company invest in R&D or modernization when they are protected by a tax on imports?

Certainly there are situations in the global trade arena where governments need to step in to ensure a level playing field. This is necessary in the case of subsidy or dumping in situations where it can be proven that products are being sold at a loss in the short term to gain advantage and build marketshare versus the competition. Government intervention is also necessary when intellectual property laws are being violated.

TARIFFS ON FLOORING
In President Trump’s attempt to balance the trade levels with China this year, he has threatened to impose three rounds of tariffs, the third round of which includes a wide range of consumer products-valued at $200 billion annually-and floorcovering is on that list.

When this third round was first suggested, the proposed tariff was 10%, but in early August, the Trump administration raised the ante to 25%. Ante is an appropriate word in this instance because many believe that this is a game of poker and most likely will never become a reality. Nonetheless, many are taking it seriously. The comment period in Washington for this third round of tariffs has been extended to September 5.

Should this third round of tariffs go through, the biggest short-term impact on the flooring business will be in the LVT category, where consumer demand far exceeds domestic manufacturing capacity. LVT, along with its multilayered flooring derivatives, were developed and refined in China, and it would take several years for domestic capacity to catch up to increasing consumer demand. As a result, any tariff on this sector of the business would inflate prices on the category, forcing the retailer and the consumer to pay more for the product.

As the tariff debate continues to escalate and with the inclusion of flooring on the list, it has been interesting to see on which side of the debate some of the industry’s leading suppliers are lining up. Stay tuned for more objective coverage of this story as it continues to unfold.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.