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Tariffs: Will They Stay or Will They Go?

It’s safe to say that the Trump administration’s multiple rounds of tariffs resulted in price increase after price increase after price increase in the HVAC industry.

While President Trump said the 10 percent aluminum tariff and the 25 percent steel tariff were intended to establish free and fair trade, and to protect national security, here’s a look at how the tariffs have impacted the HVAC business, coming from a few different industry perspectives.

GENERAL OVERVIEW

“The industry remains strong, as is evidenced by the 2018 shipment data,” said Francis Dietz, vice president of public affairs for the Air-Conditioning, Heating and Refrigeration Institute (AHRI).

That data he referenced shows that, as of December 2018, year-to-date U.S. shipments of gas warm-air furnaces increased 9 percent, oil warm-air furnaces increased 3.1 percent, central air conditioners increased 4.1 percent, heat pumps increased 12.2 percent, residential gas storage water heaters increased 3.7 percent, and residential electric storage water heaters increased 2.5 percent.

“If the tariffs continue for any significant length of time, however, it could begin to affect the industry — and its customers — in a negative way,” Dietz added.

What started out as a couple of Section 232 tariffs on steel and aluminum imports last March was soon followed by the first round of Section 301 tariffs, which imposed a 25 percent tariff on over 1,000 individual items imported from China. Round two included 279 items with a 25 percent tariff, again only on imports from China. And when round three came, the list included over 5,000 items with a 10 percent tariff.

That 10 percent tariff was due to increase to 25 percent on March 2. However, it was pushed back as Trump relayed there has been significant progress made on that front.

“But there is rumor to be a list four, which is everything else,” said Charlie McCrudden, director of government affairs, Daikin.

So what does that mean for contractors? Well, the answer depends.

CONTRACTORS STAND STRONG

When the tariffs were first announced, Todd Washam, director of industry and external relations, ACCA, said ACCA was concerned that the price increases would encourage customers to put Band-Aids on their systems — opting for patchwork repair jobs rather than replacing old equipment.

However, Butch Welsch, a contractor in St. Louis, said he hasn’t seen much of that happening, despite the fact that he has raised prices.

“The reason for that is this,” he said. “Most people have not purchased a heating and/or air conditioning system in several, if not many, years. Therefore, they really don’t have a frame of reference.”

Dietz agreed, saying that a repair rather than replace kind of situation is more likely to occur with a sudden price spike, similar to what occurred with the 2006 jump from the federal minimum of 10 SEER to 13 SEER.

“In fact, because of the Freon issues and the fact that electronically commutated motors (ECMs) are going to be required on furnaces after July of this year, more people are replacing now,” Welsch said. “While we have had to raise prices due to the steel increases, the percentage of sheet metal in the majority of our company’s jobs has meant that the price increase didn’t really shock our customers.”

Plus, this isn’t the first time it’s happened.

“We have been dealing with these sort of issues for years,” Welsch said. “We know how to regulate our prices to continue to make a profit while remaining competitive.”

MANUFACTURERS POINT OF VIEW

One message that has been clear across the board is that companies either have to absorb the costs or pass them along. The same holds true for OEMs.

“Obviously, manufacturers like to keep price increases to a minimum,” said Dietz.

But McCrudden pointed out why that may be easier for some than it is for others. Individual manufacturers feel the effect in different ways. For some companies, the concern may be one commodity or specific parts subject to the tariffs. That explains why some manufacturers may have passed along what seems like more of the cost to the customers.

Additionally, several manufacturers requested exemptions where permissible, or testified at hearings to have certain items removed from the list. While some exemptions have been granted, others are still lingering in the process somewhere.

“They got 10’s of thousands of exclusion requests” McCrudden said. “When we participated and testified at these hearings, the panelist would always say, ‘Well, you want to import this part, but why don’t you just get it from somewhere else?’ And the response had always been that it takes a long time to qualify and certify components from another source. And in many cases, the production or manufacture of these components have all moved to China because it’s old technology. It’s not what they call ‘critical’ with any national security concerns — some of these things are simple things, like fasteners to join two pieces of metal together. Nobody in the U.S. is making these things; no one wants to make these things here.”

The other aspect of these tariffs, which can’t be overlooked, is that companies with manufacturing plants outside the U.S. won’t see the impact of these tariffs, according to McCrudden.

“That’s the work around,” he said. “That’s the irony of the unintended consequence of this policy. It can have a beneficial effect for firms functioning outside of the U.S.”

But the future isn’t all gloom and doom.

“ACCA is on board to fight the tariffs and help any manufacturer get an exemption,” said Washam.

And Dietz extended the friendly reminder that tariff increases have occurred before and typically do not last for extended periods of time.

“We will see how this plays out in the coming months,” he said.

So far, things are looking up. President Trump extended the original deadline to increase the tariffs from 10 to 25 percent for all items included on list 3. That’s good news for manufacturers. But regardless of what happens now regarding the tariffs, the prices have already been raised — they are not going to come back down.

When the prices go up on something that people purchase on a regular basis, it’s much more noticeable, said Welsch. The small, incremental increases that HVAC contractors sometimes have to make — not just for tariffs, but for health care, transportation costs, etc. — don’t have that much of an effect on consumers.

That’s why contractors, who haven’t already, need to adjust their prices accordingly, to ensure they stay competitive and profitable in this ever-changing industry.

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