US manufacturers are facing increasing trade tensions

Austin Ramirez, a Wisconsin-based businessman, had planned to build a factory in Mexico until very recently as part of the company's global strategy to shift production away from China and expand globally.

The CEO of Husco said that Mexico made sense six months earlier. Husco produces hydraulic components for automotive and off-road vehicles, such as bulldozers.

Now, it's not as bad.

Husco, like many other U.S. manufacturing companies, faces an increasing list of trade policies that are being implemented by the Trump administration. These policies have disrupted investment plans and slowed the growth of the U.S. manufacturing industry.

Many producers were shocked by the threat of tariffs on Mexico, which is the biggest U.S. trading partner for goods.

Trump's campaign made the theme of boosting manufacturing his main focus, promising tariffs and less regulation. This stance won support from industrialized regions and swing states such as Wisconsin.

Now that these policies are in place, and include moves this week to impose additional 25% tariffs for all imports, steel and aluminum included, the true cost is also becoming more apparent. Tariffs on metals will, for example, help domestic mills who produce them, but result in higher prices for a much larger network of businesses like Husco which use these raw materials.

The threat of trade conflicts has led to a growing level of uncertainty about how companies should structure their global supply chain.

Nick Pinchuk of Snap-On Toolmaker, Kenosha (Wisconsin), told investors that putting the election "in the rear-view mirror" would reduce the uncertainty among customers and boost the business for the coming year.

He said that it is hard for many customers, including blue-collar workers, to not feel the "macro uncertainties" caused by "ongoing conflicts, immigration disputes, lingering inflation."

The Federal Reserve's aggressive tightening of monetary policy between March 2022 to July 2023 in order to curb inflation has had a major impact on manufacturing, which represents 10.3% the economy. The factory sector is not showing any signs of strong growth, despite the fact that the central bank began cutting rates in September last year. The U.S. manufacturing sector expanded in January, the first time it had done so in over two years. However, the threat of tariffs is causing economists to question whether this rebound can last. Some parts of the manufacturing industry are doing well, thanks to orders that were overflowing from the pandemic boom. Emerson, an engineering solutions provider based in St. Louis, announced last week that its first-quarter profit exceeded estimates, thanks to a resilient demand for its valves-and-regulators unit.

Lal Karsanbhai, CEO of the company, told investors on a conference call that he expects significant growth in orders in the second half.

Even they are concerned about tariffs. The company stated that it would be ready to increase prices and add surcharges in order to protect profits, if for example new tariffs were imposed on Mexico.

David MacGregor is the senior analyst and president at Longbow Research, based in Cleveland. He said that, "until a couple of weeks ago", he believed U.S. manufacturers were preparing for a good year in 2025.

He noted that "most of these companies are pretty busy with their order backlog."

MacGregor says he sees that more companies are "taping on the brakes." MacGregor said he noticed in the recent wave of earnings reports that consumers were not spending as much on large discretionary items like motorcycles.

Harley-Davidson, a Milwaukee-based motorcycle manufacturer, has forecast that its profits and revenues will be flat or down by 5 percent in 2025 as consumers are hesitant to make large-ticket purchases. The demand for high-priced toy purchases, which boomed in the lockdown days, has dropped. Sticky inflation and high rates of interest have also forced consumers to spend more on necessities.

John Healy is a managing director of Northcoast Research, located in Cleveland. He and other analysts expect consumers to be more confident in their spending habits in the months to come.

"But it hasn't yet materialized in retail," he said. He noted that, while the interest rates set by Fed have decreased, consumer borrowing costs are only marginally lower.

Ramirez, the CEO of Husco in Waukesha (Wisconsin), said that his business is still robust, and he wants to continue with expansion plans originally planned for Mexico but not the United States.

He said that building in the U.S. was not an option because the products to be manufactured in the new facility have a high level of labor. He's considering India or another country with lower costs. Ramirez says that recent weeks have demonstrated that tariffs can hit anywhere.

"We've already seen how quickly things can change," said he, "so making a decision is really difficult." (Reporting and editing by Daniel Burns, Claudia Parsons, and Timothy Aeppel)

(source: Reuters)