US President Donald Trump has — for now — backed off of his steepest tariff increases. But with other duties still in place, doing business in the US is about to get costlier for European Union (EU) companies.

While nobody knows for sure what’s going to happen, firms are rushing to secure their supply lines and protect their US business. Some are boosting inventories in the US, others are considering price hikes, and others still are shifting production. And as Trump looks to chalk up concessions, some firms are seizing the moment to unveil or expand US investments they had already been planning.  

In light of the uncertainty, said Varun Marya, who oversees McKinsey & Company’s Advanced Industries practice, “company leaders should be focused on organising their management teams so they are prepared to respond quickly.”

German luxury carmaker Audi has suspended stateside imports. Sogrape SA, Portugal’s biggest wine exporter, will draw down on a six-month stockpile it’s been building up for this very moment. Swiss drugmaker Novartis AG announced plans to pour US$23 billion into American operations over the next five years. And Jeep owner Stellantis NV, which already halted production in Canada and Mexico, will extend employee discounts to customers to bolster sales.

As Europe’s top export destination, the US is a vital market. It accounted for more than 20 percent of all EU exports last year and drove €865 billion in transatlantic trade, according to Eurostat, the EU’s statistical agency. Ireland sends nearly half of its extra-EU exports to the US, which also anchors growth for major economies such as Germany and Italy.

“Europe did not choose and has no interest in this trade war,” said Niclas Poitiers, a trade expert at the Bruegel think tank in Brussels. “Despite everything, the US remains the EU’s most important economic relationship.”

For European carmakers, the US has been a critical market as sales have sagged in recent years in the EU and China. American interest in high-margin SUVs and pickup trucks has helped manufacturers weather softening demand and increased pressure on margins.

Even with Trump’s 90-day reprieve on so-called reciprocal duties, the combination of 10% baseline tariffs and 25% tariffs on steel, aluminum and car exports will significantly impact the sector. The Audi Q5, for example, is the company’s top-selling car in the US. Under the new regime, it is operating under the assumption that it will be taxed more than 52% — 25% for car imports duties, 25% for shipments from China, and a 2.5% company penalty for not complying with a free trade agreement Trump established during his first term.
Victorinox Swiss army knives.

To avoid higher costs, Mercedes-Benz Group AG is racing to import higher-end models before anticipated price hikes go into effect, and Volvo Car AB plans to increase production at its South Carolina plant. Volkswagen AG has warned US dealers that it will add import-related surcharges to the sticker prices of vehicles entering the country — effectively shifting the cost burden to American buyers.

Joerg Burzer, who oversees production and supply chain management at Mercedes, said the company is still evaluating the tariffs to understand their full impact.

“We have made some plans,” he said, “but flexibility is absolutely key.”

Some companies are better prepared to adapt to the tariffs — or they simply got lucky on timing. Clariant AG, a Swiss chemicals company, will move some of its production to a factory it owns in Florida. As part of an ongoing plan to produce more in the US, Novartis announced plans to invest in six new US-based manufacturing sites and a research center in California. UK-based protein shake maker Applied Nutrition was already expanding its footprint in North America when tariffs were rolled out.

If needed, said chief executive officer Tom Ryder, it could accelerate the launch of a US production line. The company could “move that plan forward effectively tomorrow if we wanted to.”

For firms that cannot operate outside of their home countries, however, options are more limited.

Carl Elsener, the CEO of Swiss army knife-maker Victorinox AG, said the tariffs could devastate his firm’s bottom line. The company has no interest in producing Swiss army knives outside of Switzerland, and the US is Victorinox’s largest market, accounting for more than a fifth of all global sales.

“We are examining the extent to which price adjustments are possible without losing significant market share,” Elsener said.

Scotland’s tweed industry is in a similar position. Already reeling from the impact of Brexit on European sales, manufacturers are now bracing for an additional hit. Maxwell Alderton, the marketing director and US regional president for the menswear brand Peter Christian, said the company reduced its marketing budget on the other side of the Atlantic. It also rolled out a 10% discount for US-based customers, which it advertises as “reverse tariffs.”  

Renzo Rosso, the founder of Italian retail brand Diesel and chairman of parent company OTB Group PLC, described US price hikes as unavoidable.

“I don’t have much choice right now,” he said. “Consumers are holding back on making purchases.”

Ryder, the CEO of Applied Nutrition plc, did point to one potential upside of the unfolding trade war: should countries launch retaliatory tariffs against American products, European businesses could stand to benefit. His company has already seen a surge in Canadian distribution, and he expects to find similar traction in Japan and China. As he put it, “UK brands may become more attractive in those markets as US products become more expensive.”

In other cases, European companies already operating in the US could even gain an edge over US competitors that import into the country. Backmarket, a French company that sells refurbished electronics and smartphones, has seen US sales more than double in the past several days, said CEO Thibaud Hug de Larauze.

That’s because of anticipated price hikes from companies like Apple, which is doubly exposed to tariffs as it assembles many of its products in China using US-made components, then ships them back to the US.

“If you put yourself in the shoes of an American consumer, buying reconditioned was already cheaper than buying new,” he said. “Now, it’s going to become much, much cheaper.”

Source: The Edge Malaysia

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