Over the last few months, the news has been full of stories about tariffs imposed by the Trump administration, retaliatory tariffs from other countries, and a potential trade war. Will they impact the car wash industry? They might.

The tariff story is evolving so quickly that, between the writing of this article (early August) and its publication, much will have changed. However, we can offer a bit of background to help you understand what the tariffs mean and what to watch for as events unfold.

What Is a Tariff?

“Tariff” is a 16th century word for a tax, and today refers specifically to taxes on imports or exports, also known as duties. The U.S. has a long history of tariffs. The second bill passed by Congress, in 1789, was a 5 percent duty on all imports. The concept of a tariff to protect emerging or “infant” industries was promoted by, among others, Alexander Hamilton, first Secretary of the U.S. Treasury. Before the 20th century, however, tariffs were not only used to protect specific industries. Until the creation of the income tax in 1914, tariffs were the chief source of revenue for the U.S. government, amounting to 95 percent at times. In the modern era, tariffs have protected established industries as well emerging ones, and have been used as a negotiating tool for international trade agreements.

Who Pays?

The tariffs imposed by the Trump administration are all import duties, a tax collected at the border by the U.S. government. They include global tariffs on basic steel and aluminum products, foreign-made washing machines and solar panels, softwood lumber from Canada, and about $34 billion (annually) of Chinese industrial and B2B products.

When tariffs are imposed on basic materials such as steel, aluminum and lumber, it is assumed by most economists that the increased cost at the border gets passed along to each other entity throughout the entire sales chain, down to the end consumer. This can have ripple effects on many other industries and many jobs. Tariffs on intermediate products and finished goods are also assumed to be passed along in the form of higher prices downstream, but since they only come into effect partway downstream, so their ripple effects may be more limited. All the tariffs are, effectively, new federal sales taxes on those products and everything made from them.

What Is a Tariff Designed to Do?

The express intents of these tariffs are to cut down on the supply of foreign goods by making them more expensive, so that U.S. producers of the same materials (whose costs are generally higher) can compete better for market share.

The express purposes of the steel, aluminum, lumber, washing machine and solar panel tariffs are to boost certain specific industries that have complained of being injured (or at risk of injury) by foreign competition. In the case of Canadian softwood lumber, tariffs are allegedly a response to unfair trade practices – government subsidy of the lumber industry and product dumping. The steel and aluminum tariffs are based on the notion that the domestic industries are suffering so much from foreign competition that they need to be protected to stay in business at all, and their loss would be a threat to national security. The solar panel and washing machine tariffs are “safeguard measures” as authorized by the Trade of of 1974, imposed simply because the volume of imports allegedly injures those domestic industries.

However, the Trump administration has communicated other motives, as well. Beyond the scope of the legal justifications, they have suggested that the Canadian softwood lumber tariff had some connection to the dispute in dairy trade; the steel and aluminum tariffs have been mentioned as part of the re-negotiation of the North American Free Trade Agreement (NAFTA) and in connection with attempts to get Europe to change its tariffs on automobiles. The China-specific tariffs are expressly concerned with persuading China to change its trade and business policies, including forcing U.S. manufacturers to divulge their intellectual property in order to do business in China.

The administration has discussed most of the tariffs largely in terms of protecting jobs. However, the complaints upon which these tariffs are based have come from companies and trade associations, not from labor unions. There is also no guarantee that they will result in keeping or adding jobs. The companies could use the increased demand to justify more investment in more robotics.

However, the increased costs of the products they make may imperil jobs connected to all the downstream uses. Critics of the tariff policy estimate that for every steel- or aluminum-producing job that is protected, as many as 80 other down-the-line jobs will be negatively impacted. They fear a general economic downturn.

Most likely, the real motive behind these tariffs is to coerce trade negotiations – the stick in the carrot-and-stick approach. There is one sentence in the steel and aluminum proclamations expressly inviting other countries to negotiate.

The pattern of the Canadian softwood lumber dispute over the past 30 years is a repeated cycle of tariffs, followed by negotiations, followed by trade deals. The most recent iteration resulted in a softwood lumber agreement that was in effect until October 2015. Instead of U.S. import duties, Canada agreed to impose export duties, and to make Canadian lumber producers pay higher “stumpage” fees to fell trees on government-owned land.

It had the same effect on the U.S. as an import tariff – higher prices – but Canada liked it better, since they got to collect the duties. Prices rose over time, peaking in September 2014, about a year before the agreement was due to expire. It became apparent that a new deal was not being negotiated. Prices fell, bottoming in September 2015, a month before the agreement ended. There was a 12-month cooling off period (part of the original agreement) during which no trade complaints could be filed, when there was no agreement and no tariff. Prices rose and then stabilized through mid-2016. As soon as the cooling off period ended, a case (complaint) was filed by a coalition of U.S. lumber producers, and prices shot up on expectation of new tariffs. By the time the tariff was in effect, the higher price was already baked in, and it remained stable for a few months, then resumed rising. In June 2018, prices were 90 percent higher than in September 2015.

What Do Tariffs Actually Do?

The effects of tariffs have proven difficult to predict.

Trump’s public discussion of a potential solar panel tariff last summer made prices shoot up as U.S. companies rushed to buy foreign panels before the duty took effect. Increased prices chilled demand. Reuters reported that they “led U.S. renewable energy companies to cancel or freeze investments of more than $2.5 billion in large installation projects, along with thousands of jobs.” Then China slashed its solar incentives and subsidies, making demand in China plummet and resulting in worldwide oversupply of solar panels. Prices in the U.S. have dropped back to where they were before last summer’s price rise, and worldwide prices may fall as much as 35 percent.

The washing machine tariff, promoted by U.S. manufacturers such as Whirlpool, caused two foreign manufacturers LG and Samsung, to increase their investments in U.S. manufacturing plants: good for jobs, but bad for Whirlpool. Then the steel tariffs were imposed, increasing the cost of all washing machines made in the U.S., and now there are signs that demand is falling.

In response to the U.S. tariffs, several countries have announced retaliatory tariffs. China imposed a tax on U.S. soy beans, for example, which will impact farmers and the communities they live in. Trump has reportedly negotiated a deal with the European Union that includes Europe buying more U.S. soy beans, but will it fully offset the reduction from China? The situation continues to evolve.

What to Expect

The current tariffs are unlikely to have a direct effect on car washes unless you are in the process of constructing a new building, and even then, materials are usually not as significant a piece of the construction budget as labor. Indirect impacts are harder to predict. Where soybean farming is a big piece of the local economy, it could be bad. Next to a steel mill, it could be good.

If, as many economists fear, the tariffs and escalating trade war make the overall economy slow down, it could have a serious effect on the car wash business everywhere. On the other hand, if there is an economic downturn, more people could wind up driving for Uber or Lyft, and that could be good for a car wash business.

n answer to the question, what to expect? The best advice is, “buckle up.”