For One California Company, Trump's Tariffs Have Unintended Consequences

Apr 19, 2018
Originally published on April 20, 2018 9:28 pm

In the struggling canned goods industry, Pacific Coast Producers is a survivor, taking some 700,000 tons of fruit grown by California farmers each year and canning it for sale in supermarkets and large institutions such as hospitals.

This year the company, based in Lodi, Calif., is facing another challenge that promises to make turning a profit that much harder: President Trump's tariffs on steel imports.

"That one cost increase is more than half of what we make," says Dan Vincent, the company's president and chief executive.

Pacific Coast Producers' plight underscores some of the unintended consequences of the Trump administration's decision last month to impose 25 percent tariffs on steel and aluminum imported from other countries. The administration said the tariffs were needed to protect domestic sources of the metals, which are vital for national security.

The tariffs will help steelmakers compete by allowing them to raise their prices, but companies that rely on imported steel products, such as Pacific Coast Producers, will see their costs rise, says Edward Alden, senior fellow at the Council on Foreign Relations.

"That's why tariffs are a risky strategy in a truly global economy," he says.

Pacific Coast Producers buys the cans it uses from domestic manufacturers. They are made with steel coated in something called tinplate.

U.S. steel manufacturers tend not to sell a lot of tinplate, because it's not very profitable.

"There's not a great deal of capacity that's dedicated to tinplate steel for food cans," says Robert Budway, president of the Can Manufacturers Institute.

As a result, U.S. can makers — who sell more than 20 billion cans a year for food products alone — have to import much of the tinplate they use from places such as Europe and Japan.

The Trump administration has given temporary exemptions to many steel producing countries. Exemptions for Canada and Mexico are contingent on the outcome of ongoing trade negotiations.

But for now it's unclear how can manufacturers will be affected.

If the tariffs do apply to tinplate, it will almost certainly drive up costs for can-makers, which will be passed on to companies such as Pacific Coast Producers.

How much will their costs rise? Commerce Secretary Wilbur Ross says the extra expense will be negligible.

Vincent sees things differently.

He notes that the cost of steel makes up about 20 percent of his company's annual expenses of about $355 million. A 25 percent tariff on steel could thus end up costing the company about $17 million. Its annual profit is about $24 million, he says.

There's no guarantee the tariffs will end up costing that much, since the Trump administration could end up exempting some of the countries that now sell tinplate.

But in a low-margin business, beset by imports from places such as China and a growing consumer preference for fresh produce, even a small increase can hurt.

And Vincent points out another irony about the tariffs: Foreign companies that import products such as canned peaches into the United States won't face the same cost increase, because they aren't subject to the tariffs.

"They won't hurt our Chinese competitors at all, because they import a finished good. That's classified as canned peaches. That's not classified as steel. So a steel tariff doesn't apply," Vincent says.

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When President Trump decided to impose tariffs on steel and aluminum imports last month, he said he wanted to protect two industries vital for national defense. But in a global economy, putting tariffs on imports can have unintended consequences. NPR's Jim Zarroli looks at how steel tariffs will affect the canned goods business.

JIM ZARROLI, BYLINE: Pacific Coast Producers is as a co-op representing 168 family farms in California. CEO Dan Vincent says each year, the company sells more than 700,000 tons of fruit.

DAN VINCENT: Peaches, pears, apricots, grapes and tomatoes.

ZARROLI: The company cans the fruit and sells it to supermarkets and hospitals. Pacific Coast Producers doesn't make the cans it uses. It buys them from manufacturers in the United States. Cans are made of steel coated in something called tinplate. There was a time when virtually all tinplate used in the United States was made here. In the 1950s, U.S. Steel put out this film about how it was made.


UNIDENTIFIED PERSON: We're always glad to talk about our tinplate. We take a sheet of steel and put a protective coat of tin over it. Then you have tinplate.

ZARROLI: But today, most American steelmakers don't make a lot of tinplate. Dan Vincent says it's not profitable enough.

VINCENT: The U.S. - they don't even have the ability to do it, nor do I think they want to do it. There are other higher margin businesses they've focused on.

ZARROLI: So more than 60 percent of the tinplate used today is imported from places such as South Korea and Europe. The Trump administration is deciding whether to permanently exempt some countries from the tariffs. But if the tariffs do go through, Commerce Secretary Wilbur Ross insists the impact on prices should be negligible. Ross appeared on CNBC recently holding up a soup can.


WILBUR ROSS: So if that goes up by 25 percent, that's about six-tenths of one cent on the price of a can of Campbell's soup. So who in the world is going to be too bothered by six-tenths of a cent?

ZARROLI: And Ross isn't wrong, says Dan Vincent. The tariffs probably won't add much to his costs, but the canned goods business is really struggling right now. Customers more and more prefer fresh produce. Companies such as Vincent's face intense competition from imports, especially from China. Profit margins are very small, and Vincent says that extra costs from the tariffs could actually wipe out a good part of this year's profits.

VINCENT: That one cost increase is more than half of what we'll make.

ZARROLI: And that same dynamic is playing out across a lot of industries. Edward Alden of the Council on Foreign Relations says tariffs are great if you're a steelmaker.

EDWARD ALDEN: But if you're a steel user - and, you know, the number of steel users in the United States vastly outnumbers the number of steel producers - your costs have gone up.

ZARROLI: And when costs go up, companies have to deal with it. The higher cost could force Pacific Coast Producers to raise its prices. And here's the ironic thing. Vincent says all of his foreign competitors who now import canned fruit into the United States - they're not affected by the tariffs.

VINCENT: They won't hurt our Chinese competitors at all because they import a finished good. You know, that's classified as canned peaches. It's not classified as steel. So a steel tariff doesn't apply.

ZARROLI: So the tariffs will actually place Pacific Coast Producers at a disadvantage against foreign imports. Can makers have asked to be exempted from the tariffs, arguing that they can't get all the tinplate they need domestically. But the government has gotten hundreds of similar requests, and it's likely to take many months to wade through them. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.