From Home Furnishing Business
Statistically Speaking: Upsetting the Balance of Trade U.S. versus Canada
Canadians like to say that Americans have invaded Canada twice, in 1775 and 1812, and lost both times. A new kind of war has been brewing over the summer, this one involving trade tariffs. At the end of last May the Trump Administration imposed a 25 percent tariff on U.S. imports of steel and aluminum from the E.U., Mexico and Canada prompting the Canadians to respond with tariffs on a vast medley of U.S. goods, totaling $16.6 billion CAD (an estimated $12.8 billion USD). Those numbers are roughly equal to the Canadian steel and aluminum exports to the United States.
Directly impacting the furniture industry is a Canadian imposed 10 percent tariff on U.S. upholstery and mattresses coming into its country. The Trump Administration insists that imposing tariffs on steel and aluminum, not just to Canada, but Mexico and Euro-Asia as well, is designed to level the playing field and return manufacturing and jobs to America. At press time, the U.S. and Mexico had come to a preliminary agreement to rewrite the old NAFTA pact and Canada was still at the table. (See box insert below).
The Canadian retail indoor furniture industry is about 10 percent the size of the U.S., $9.8 billion CAD compared to $99.8 billion USD(Table A). In addition, the Canadian industry grew more slowly as it recovered from the last recession, 2.9 percent annual growth (CAGR) versus U.S. 4.7 percent for the U.S (Table B).
Given the vast difference in the populations of the two countries it should be noted that Canada relies much more on the furniture industry of the U.S. than vice versa. In 2017 the U.S. exported only slightly more indoor furniture and bedding products to Canada than it imported, finishing the year with $1.77 billion in exports to Canada compared to $1.71 billion in imports from our sister country. However, imports from the U.S. into Canada represent about 23 percent (plus or minus) of the total Canadian indoor furniture industry compared to Canadian imports into the U.S. at about 1.7 percent (Table C).
The furniture and bedding trade gap between the two countries has been narrowing, especially since the recovery began from the last recession. Although U.S. imports of indoor furniture and bedding from Canada have increased by 40 percent in the past seven years, exports are still 4 percent higher and have grown 13 percent from 2010 to 2017 (Table D).
Without a totally renegotiated new deal, about 30 percent of the $1.77 billion USD in indoor furniture and bedding exported by the U.S. to Canada last year would now be subjected to a 10 percent tariff. The two furniture areas targeted by the Canadians are upholstery and mattresses, as shown in Table E. Upholstery accounts for 22.3 percent of U.S. furniture exports, while mattresses account for 6.6 percent.
Last year, Canadian furniture retailers imported $396.3 USD million worth of upholstery from the U.S., which was up from $378.7 million in 2016. Since 2010 U.S. upholstery coming to Canada grew only 4.6 percent. The U.S. is the second largest importer of upholstery into Canada behind China, whose imports were valued at $692.0 million in 2017. Despite the smaller size of mattress exports to Canada, the amount has jumped 84 percent over seven years, increasing from $64.3 million in 2010 to $118.2 million in 2017 (Table F).
Many observers believe the big ticket categories chosen by Canada – upholstery, mattresses, refrigerators, dishwashers and washing machines – were strategically picked to pressure leading members of the U.S. Congress to negotiate what Canada thinks would fairly benefit both countries.
According to an article by Michael J. Knell, Home Goods Online, a Canadian market intelligence firm, “Upholstery is probably on the list because Ashley Furniture Industries is in Wisconsin, the state represented by Paul Ryan, the outgoing Speaker of the House of Representatives. While there is no specific data available, Ashley is believed to be one of the largest single exporters of upholstery in Canada, followed by La-Z-Boy, the publicly-held furniture maker with factories in five states including Missouri, Mississippi and N.C. It closed its only Canadian factory in 2005.”
Knell further indicates that “Mattresses are probably on the list because every TempurPedic mattress sold in North America is manufactured by Tempur Sealy International at their factory in Kentucky, the home state of Mitch McConnell, the majority leader of the U.S. Senate.”
As shown in Figure 1, of all upholstery and mattresses imported into Canada from all countries, the U.S. controls about 31.7 percent of upholstery imports and 51.5 percent of mattresses in Canadian dollars (2017). This data is from the Retail Council of Canada’s International Merchandise Trade Database.
Besides upholstery and mattresses, other home furnishings products are also facing 10 percent tariffs imposed by Canada, most notably major appliances. The U.S. controls about 41 percent of total household appliances imported into Canada, roughly $490.8 million Canadian dollars (Figure 2).
The Canadian tariffs on U.S. products are designed to counter the Trump Administration’s 25 percent steel and aluminum tariffs. While the 10 percent tariff response may seem positive for Canadian manufacturers, according to a report by the Retail Council of Canada (RCC), Canadian consumers are facing two negative impact areas – one direct and the other indirect. The RCC’s report states that “the most immediate direct effect of a tariff is an increase in price to the consumer. But the indirect cost of a tariff increase is often reduced consumer spending.”
The report further states that Canadian consumers will face a crisis of “substitutability” of some consumer goods. With upholstery and mattresses, the problem is that both China and Vietnam face a MFN (Most Favored Nation) tariff of 9.5 percent on furniture, so there is no relief found in shifting product orders away from a 10 percent tariff on U.S. imports to the 9.5 percent on Chinese or Vietnamese imports. The RCC said that while the Canadian furniture industry might be able to meet some of the need, increased demand and the lack of competing tariff-free alternatives is apt to lead to price increases from Canadian sources.
For big ticket items frequently purchased together, like major appliances, the 10 percent tariff could potentially deter purchases altogether. Also, there are no domestic sources of supply for appliances, so unlike most of the other goods, retailers would be wholly dependent on sources in Mexico and Asia. The RCC report goes on to point out that “with Mexico being the only plausible source of a tariff-free supply of major appliances, prices from that source will most likely increase”.
The Trump Administration is determined to “level the playing field” for U.S. manufacturer’s claiming the NAFTA agreement has been a bad deal for the U.S. But history has shown that trade wars tend to hurt consumers on both sides of the border. As the final renegotiation of the NAFTA agreement makes its way through Congress, trade between Canada and the U.S. will either be healthier for the two countries or will further sour relations.