For One U.S. Bike-Maker, Tariffs Are A Mixed Bag

May 18, 2019

Zakary Pashak is a rare breed. His company, Detroit Bikes, is one of the very few American bicycle makers. Most bikes come from China.

At times, Pashak endured ridicule at trade shows. “I’d get kind of surly bike mechanics coming up and telling me that my products stunk. There’s definitely a fair bit of attitude in my industry,” he says.

But last September, the industry’s tune abruptly changed. The first round of U.S. tariffs, or import taxes, upped the cost of Chinese-made bikes by 10%, and companies saw Detroit Bikes as a potential partner.

“All of a sudden I felt like the belle of the ball or something,” Pashak says.

Now a new round of tariffs set at 25% is hitting imports from China. Like many other American companies, Detroit Bikes is poring over the 194-page list of imported Chinese goods subject to the levies. Companies like Detroit Bikes rely on those goods, and now they face choices that will ultimately determine the prices consumers will pay.

Pashak started the company when he moved to Detroit in 2011, at a time when the city was reeling.

“What drew me to Detroit was the history, the music, the manufacturing,” he says. “But it was also the state that the city was in at the time.”

The financial crisis slammed automakers, laid off thousands of workers, many of whom abandoned their homes. Pashak envisioned an urban revival. Using those idle factories and workers, he wanted to build an American-made bicycle, which is how Detroit Bikes was born.

This month, the Trump administration upped the taxes it charges on Chinese imports by an additional 15%. Now, several companies seeking to avoid those added costs are considering hiring Detroit Bikes to manufacture bikes for their brands.

“If these tariffs are still in place next year at this time, I would anticipate that would probably be quite good for my business,” he says.

But the tariffs aren’t all good for Detroit Bikes. In fact, Pashak says the effects are so convoluted, he’s not sure yet whether they will ultimately help or hurt.

For one thing, his company relies on imported parts — rims, spokes, tires, cranks — most of which come from China. Tariffs on those also increased 25% since last fall, driving up Detroit Bikes’ expenses. To counteract that, Pashak is painstakingly evaluating each part, to see whether cheaper alternatives are available elsewhere.

He’s looking at parts made in Taiwan, which aren’t subject to tariffs. Or Cambodia, which he says is “the new hot country … that everyone’s trying to rush into.”

Businesses like Detroit Bikes react to tariffs in many ways, and one of the most significant is in finding alternate sources of goods. If Pashak succeeds in finding cheaper substitute parts, he keeps costs down on his bikes, which range from about $400 to $1,250. That then blunts the overall price increase for his customers.

Economists call this “substitution,” and say it affects how much consumers pay for tariffs.

“The impacts of these wars depend heavily on the substitution effect,” says Amit Khandelwal, a professor of international business at Columbia University.

Some substitutes are relatively easy to find. When China slapped retaliatory tariffs on American soybeans and corn, for example, buyers quickly turned to suppliers in South America.

But finding replacements for things like bike chains or software chips is considerably harder; factories can’t just be ginned up on demand. “Generally, the more specialized products often take longer to substitute,” Khandelwal says.

And timing is a key factor. It’s unclear whether the tariffs will remain for a week, a month, or years. Businesses, from farmers to retailers, are reluctant to make big changes when they can’t plan for the long haul.

That limits options for companies like Brooklyn Bicycle Co., which is based in its namesake city. It sources all its parts from 40 Asian countries, which are then assembled in China, before being shipped to the U.S. Ryan Zagata, the company’s president, says it would take about a year to rethink his supply chain and find options outside of China. And “it would be incredibly costly,” he says.

Detroit Bikes’ Pashak says he’s already mapped out some ingenious — if complicated — workarounds, if the tariffs stay put.

“I can bring in Chinese parts to Canada at no tariff code, bring in a Cambodian frame to Canada. Or ship my American frames up to Canada, put the parts on them, and then import them into the country,” he says. Doing so would relieve his tariff burden, but would take months. In the meantime, he says, tariffs might go away next week.

So the easiest solution for many companies, in the short run, is to raise prices. Many of Detroit Bikes’ rivals that rely on imported Chinese bikes, say they’ll have no choice. But Pashak says he’s not sure if his company will follow suit.

“It might be better for me strategically just to let all my competitors raise their prices because they have to,” he says. In the meantime, he’ll continue exploring options to try to make the tariffs work to his advantage.

Copyright 2019 NPR. To see more, visit https://www.npr.org.

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