Fluid Tariff and Trade Policies Make US Estimators Cautious
Contractors who would prefer to make material purchases in a stable pricing environment have had to more closely monitor trade talks, tariff policy and the minutiae of world politics this year—with all three heating up over the last three months.
“Keeping up with the changing political climate is something that takes more time than it used to, for sure,” says Trent Wachsnicht, senior vice president at JE Dunn Construction Co. in Kansas City, Mo. “It’s hard to isolate a line item and really understand and know what that direct impact was from.”
The Trump administration reached a deal May 17 to remove 25% steel and 10% aluminum tariffs on Canadian and Mexican products in exchange for tougher enforcement of transshipment.
Since then, the U.S. has restarted talks with China on a long-term trade deal, and Chinese tech giant Huawei has seen a U.S. ban on its technology partially lifted after it went to court seeking a constitutionality ruling.
On May 23, the U.S. Commerce Dept. notified Congress that it is proposing a change to federal rules to allow it to impose countervailing duties on countries that purposely undervalue their own currency relative to the U.S. dollar. Comments on the department’s initial draft of the new rule closed June 27 and it has not yet gone into effect. The rule change could generate $3.9 million to $21 million in added annual duties collected if put into effect.
“This change puts foreign exporters on notice that [department] can countervail currency subsidies that harm U.S. industries,” Commerce Secretary Wilbur Ross said in a statement.
Canada, Mexico and China are not out of danger of seeing new tariffs. The American Institute of Steel Construction has brought a countervailing duties case to the department charging that domestic steel fabricators are being harmed by imports of fabricated steel—the products used most in steel frames of buildings—from all three countries.
It could be decided by this fall. This is the changing environment that construction estimators and executives have been trying to navigate in making purchases for the entire year. “From what I’ve seen of this administration, things can change very abruptly,” says Ken Simonson, chief economist of the Associated General Contractors of America.
The U.S. agreement with Canada and Mexico to drop tariffs on their steel in exchange for an enforcement mechanism happened abruptly, and Simonson says that was an illustration of how quickly things could change just as the situation with China negotiations quickly went from seemingly harmonious to bitter, and then appeared back on track during President Trump’s trip to Japan. “I don’t want to make a prediction about where this will be a month from now,” Simonson says.
JE Dunn’s Wachsnicht says that has meant holding off on purchases when possible, working more closely with suppliers and trying to minimize pricing impacts as much as possible. Even when tariffs have been reduced, that hasn’t been an immediate sign to buy for estimators. “Anytime tariffs are reduced or lifted is a good thing for us in terms of procuring materials,” he says. “But I don’t think anything is getting clearer, just as quickly as things change now.”
Many contractors have turned to using more guaranteed maximum price contracts and other instruments that can limit exposure to shifting prices and, in some cases, allocate more responsibility to the client.
“We have employed some open-book strategies on select projects, including guaranteed maximum price subcontracts,” explains Josh Lawrence, senior vice president of preconstruction at St. Louis-based McCarthy Building Cos. “More effort is focused on finding the right trade partners with creative ideas to provide the best solution for the client, regardless of the contracting method.”
Despite the shifting buying environment, both Wachsnicht and Lawrence say that prices for most materials they buy have not gone up drastically and that, because of the strong economy, they have been able to absorb increases without impacting project profitability. Both say that steel prices have been at manageable levels for the last six to eight months after coming down from the initial shock of tariffs on Canadian and Mexican products last March.
“I don’t think there is necessarily ever a good time for tariffs in terms of how we procure our materials and how much it costs us,” Wachsnicht says. “But the market can certainly absorb it better when it is in a good place. At some point, the economics of the projects won’t make sense when the rent rates don’t escalate at the same pace as construction costs do. And these tariffs certainly are a contributor to the escalation.”
The American Institute of Steel Construction (AISC) steel trade case is the last item on the agenda, with no decision expected until November, so it may be fully superseded by potential agreements made this summer with China or ratification of the U.S.-Mexico-Canada trade agreement that’s already been approved by Mexico, industry observers say.
“We still are negotiating trade with China. We are still in the process of getting [the agreement] ratified,” says Tyler Kenyon, vice president and metals and mining equity research analyst at Cowen and Co. “Whatever comes out of those larger, broader trade deals,” says Kenyon, “has the potential to add more bearing on this fabricated-structural steel trade case than the existing investigation that’s currently ongoing.”
Kenyon also says that once the trilateral agreement is approved by both Canada and the U.S., it’s going to be very difficult to know what U.S. contractors’ relationships with Canadian and Mexican suppliers will look like moving forward, compared to what they had been two years ago. U.S. steel imports have dropped roughly 11.7% on the year to-date, according to AISI.
How Canada and Mexico can implement the language of their tariff-lifting agreement, which bans countries outside the pact from shipping steel to Mexico and Canada in order for it in turn to be shipped to the U.S.—a practice known as transshipment—also remains to be seen.
The U.S. Dept. of Homeland Security has already aggressively pursued transshipment cases involving China shipping products to Vietnam and Cambodia for rerouting to the U.S. Enforcement of country-of-origin rules required stiffer penalties by the Vietnamese government on domestic companies. In the absence of similar cooperation from Cambodia’s government, the U.S. urged it to investigate a special economic zone just west of Phnom Penh that is dominated by Chinese companies, which the U.S. contends is a center of transshipment.
“The United States will aggressively pursue allegations of duty evasion and utilize all available legal tools, to deter violators of U.S. customs and trade laws,” Emily Zeeberg, U.S. embassy spokeswoman in Cambodia, said in a statement.
U.S. regulators can be expected to take a similarly aggressive approach with Canadian and Mexican authorities when investigating transshipment. There is still little certainty for contractors and their clients.
“The uncertainty has the potential to impact a company’s willingness to pursue capital investment.” Kenyon points out. “In this world right now there is quite a bit of trade uncertainty.”