Trade tensions

Sarah Paxton, co-owner of the LaDiff furniture store in downtown Richmond, is preparing for the worst.

Earlier this year, the cost of furniture she imports from China rose because of 10 percent tariffs imposed by the U.S. on Chinese goods. Furniture from China makes up roughly 10 percent of the store's sales. For the most part, she and her vendors have been able to absorb the extra cost rather than pass it on to customers.

Now, she’s facing more cost increases because of 25 percent tariffs on Chinese goods going into effect Jan 1. Paxton and many other retailers won’t be able to shield customers entirely from the effects of those tariffs. That means they will have to raise prices or get products currently sourced from China from somewhere else.

“That to me is the most important part to get across is that the consumer is the one paying this price increase,” says Paxton, who owns LaDiff with her husband, Andy Thornton.  

Paxton’s dilemma reflects one of the takeaways from the latest Virginia Society of CPAs' Economic Expectations report. 

Many Virginia accountants are worried about the harm that tariffs will cause U.S. consumers and the economy. Almost 350 financial professionals responded to the survey last summer, offering insights about major issues that will affect Virginia businesses next year. 

Here are some of the highlights.  

The economy and trade
The survey respondents generally are optimistic about the future of the state and national economies.

Nearly half believe the U.S. economy will remain strong next year. A majority also are bullish about Virginia’s economy. Many, however, also believe the health of the state economy will be a major issue in next year’s election, in which legislators will be elected for all seats in the Virginia General Assembly. 

Old Dominion University economist Robert M. McNab thinks the national economy will grow in the first half of next year. The current expansion soon will set a record as the longest since the end of World War II.

“The question is whether the ongoing trade battles will either subside into negotiated settlement or erupt into a full trade war,” he says.

McNab says the state economy is improving but still lags behind the national economy. Virginians have earned more this year than they did last year and should pocket more money next year. Their improving paychecks are partly the result of federal tax reform passed last year by the Republican-controlled Congress.

Projected increases in federal spending in fiscal year 2019 also should be good news for Virginia’s economy. That spending accounts for about one quarter of the state’s economic activity, and the regional economies of Northern Virginia and Hampton Roads are even more dependent on the federal budget.

“This is not to say there are not storm clouds on the horizon,” McNab says. “Virginia’s relationship with the federal government is a strength and weakness. When discretionary federal government spending increases, Virginia’s economy tends to benefit. Likewise, contractions or uncertainty in federal government expenditures create headwinds for the Virginia economy.”

But McNab says the more immediate threat to the economy is the uncertainty being caused by trade tensions. A majority of accountants taking the survey agree that the nation’s aggressive trade position will have a negative impact on the economy. Still, more than 43 percent of respondents believe U.S. trade policies either will have a positive impact or won’t hurt the economy. 

Bill Becker doesn’t share that view. He says the U.S. trade relations with China are creating problems for his Chantilly-based furniture company, BDI. The company sells to retailers, including LaDiff. It designs furniture in Northern Virginia but outsources production to manufacturers in China and other countries.

Because of the tariffs, he has delayed hiring employees and expects his revenue to take a hit next year.

“It’s a very bad strategy for dealing with issues that we have with China because, ultimately, this burden will fall on local retailers — in many cases small manufacturers and also the consumer,” says Becker.

Nancy Thomas also is keeping a close eye on trade tensions with China. Her organization, the Retail Merchants Association (RMA), represents roughly 500 retailers in the Richmond area. She’s urging her members to get in touch with vendors to see what effect tariffs will have on products they import. So far, Thomas hasn’t fielded many questions about the trade situation, but she expects that to change as the end of the year approaches.

“For the holiday season, most retailers won’t feel the worst of it because a lot of them may already have inventory in,” she says. “It’s the new year that’s going to bring some woes to people.”

The ultimate impact of tariffs on retailing and other industries could depend on how U.S. trade talks with China shake out. An additional factor could be the renegotiated North American Free Trade Agreement (NAFTA), now known as the United States-Mexico-Canada Agreement (USMCA), which still must be approved by the three nations.

Rising cost of health care
Another issue that raises big concerns for businesses and consumers is the rising cost of health care. Those costs consistently rank in the CPA survey as the most-pressing issue for Virginia. Nearly 34 percent of respondents picked health-care costs as the state’s biggest problem.

RMA’s Thomas says providing adequate health care at an affordable cost continues to be a huge challenge for retailers. Many believe they have to provide health-care benefits to retain employees in a tightening labor market. Employers have to determine how they’ll provide health insurance and what percentage of the cost they will be able to absorb. “What I have heard from most of our retailers is they continue to see increases in their [health-care] premium,” Thomas says.

Barry DuVal, president and CEO of the Virginia Chamber of Commerce, also says ballooning health-care costs continue to be a problem for his 26,000 members. The chamber believes association health plans offer one solution. These plans allow small businesses to group together based on industry or location to lower costs in buying health insurance.

President Trump expanded access to these plans earlier this year, allowing sole proprietors to qualify. Each state, however, sets specific regulations for association health plans. In Virginia these plans still are subject to certain provisions in the Affordable Care Act (ACA) that drive up premiums. The chamber plans to again support legislation in next year’s Virginia General Assembly session to change the requirements for the plans so that they won’t be subject to those ACA provisions.

However, critics say the plans curtail important protections. Gov. Ralph Northam vetoed two chamber-supported bills passed during the past legislative session, saying they would not include key consumer benefits.

“Through this exemption, association plans are not required to provide comprehensive coverage and may not cover essential benefits like mental health treatment, substance abuse treatment, prescription drugs or maternity benefits,” Northam said in a statement earlier this year when he vetoed the bills. “Moreover, association plans will be able to discriminate against people by charging them more because of characteristics like gender and occupation. People with minimal current health-care needs are more likely to purchase these skimpy plans, leaving people with more significant health-care needs in the marketplace.”

Virginia also filed a lawsuit in July against the expanded federal rule for association plans, saying the change would undermine the ACA. The commonwealth was joined in the lawsuit by 10 other states and the District of Columbia.

Kenn Penn, president and CEO of ChamberSolutions, a chamber subsidiary, says the plans are meant to place associations on a level similar to large employers, which aren’t subject to certain ACA requirements but still cover thousands of Virginians at an affordable price.

Uncertainty in dealing with health-care costs or trade is bad for business and the economy, says ODU’s McNab. “We don’t know what’s emanating from D.C. on a regular basis, and businesses and markets love certainty,” he adds. “They love policy process that’s slow and transparent.” 

Businesses hope they will get more answers in the year ahead.