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Tariffs, threats sow uncertainty, dampening business climate

Tariffs, threats sow uncertainty, dampening business climate, ASU experts say.
June 14, 2019

ASU professors describe how small businesses, real estate are hurt

President Donald Trump has backed off his threat to impose tariffs on Mexico over the immigration crisis, but he later said that China could face additional tariffs to the ones he imposed on goods including steel and aluminum from there last year. Two Arizona State University experts say that the ever-changing tariff situation is driving the one factor that businesses hate: uncertainty.

Tariffs are essentially taxes imposed on the American importer of a foreign product, according to Jenny Brown, an associate professor of accountancy in the W. P. Carey School of Business.

“I think sometimes people think the foreign government or the foreign company is going to pay the tariff. That’s not true,” she said.

The idea is to make the imported product costly and therefore give American suppliers an advantage.

“The idealistic notion is that these companies are going to turn to some U.S. supplier, but the fact of the matter is that manufacturers of these low-cost goods have long since left the U.S.,” she said.

“So it’s prohibitively costly to build a plant or reopen a plant in the U.S. to start manufacturing these component parts. That’s not really going to happen.”

Brown said it appears as though the threat of tariffs is being used by the administration as a bargaining chip.

“But the threat of them being imposed is enough to hurt businesses because they have to deal with this uncertainty,” she said.

That uncertainty is affecting all types of businesses and reaching the commercial real estate market in the Valley, according to Mark Stapp, director of the Center for Real Estate Theory and Practice and the Fred E. Taylor Professor in Real Estate in the W. P. Carey School of Business.

The real estate market was emerging from the recession with increased demand for labor and materials when the tariffs hit, creating problems.

Brown and Stapp answered some questions from ASU Now about the uncertainty sowed by tariffs and threats.

Question: How does the uncertainty around tariffs affect companies?

Jenny Brown: If you were manufacturing cars and you didn’t know how much the steel was going to cost, it’s hard to figure out how much product to produce and the price to set it at.

Jenny Brown

And then there’s the effect of the tariff itself, once it’s been imposed, which is the higher cost of goods.

How can I deal with that? I might try to change my supply chain. There’s a tariff on goods coming out of China so now I find somebody in Vietnam. Or I pay more to get the good from abroad and I increase the price I charge to the consumer.

Mark Stapp: It really began with the tariffs on softwood lumber. Just as the housing industry is starting to really recover, you throw these tariffs on the No. 1 building material used in housing construction — not just single family but multifamily too.

You have these tariffs on steel, aluminum and other products, including household appliances. When you’re building houses and apartments, you have stoves and refrigerators. Even the cabinets come from overseas sometimes. Commercial real estate uses steel framing.

Nearly the entire spectrum of the schedule of values, the cost associated with building, has been affected by the increase in demand and exacerbated by these tariffs in a substantial way.

Q: So would it be cheaper to lease commercial space rather than build?

Stapp: Those costs also have a big impact on the leasing market when an owner has to make improvements for a tenant, which costs more. For an owner to be able to amortize the higher cost of tenant improvements over a lease period, one of two things has to happen. You either extend the lease period or you increase the rental rates.

Now you create additional expense for businesses.

With office space in highly dynamic markets, you don’t want long leases because you can’t apply strategy to maximize the market.

Mark Stapp

Q: Do tariffs hurt small businesses more than big corporations?

Brown: Big businesses have ways they can survive the uncertainty. First, they have bigger cash flow and reserves, so if they think it will be short term, they can absorb additional coasts in their profit margins that they don’t have to pass on to the consumer. The small business does not have that slack.

Second, changing your supply chain requires bargaining power. If you have a longstanding relationship with a Chinese supplier, you can say, "I can get this from Vietnam or South America." If you’re small, you’ve been at the mercy of getting a reasonable cost and you can’t negotiate.

Bargaining power is a function of quantity and expertise. A bigger company will have a better legal team. A small guy may not have anyone on the ground in China, but a big guy can deploy a team. There are legal and transaction fees with changing your supply chain. If you’re small, it’s more costly to do that.

Big businesses can also spend money lobbying. If there are going to be tariffs, some industries will be better off.

Q: How else does uncertainty affect business?

Brown: Uncertainty will affect the stock market as well. When investors are pricing what they think the stock is worth, they’re thinking about the future cash flows of the firm. If there’s a bunch of uncertainty and that scares investors, they don’t like it. You see increased volatility in the market.

Stapp: Because of the uncertainty in pricing, general contractors will not bid jobs with estimates that last very long. It used to be you could bid a job and the bid would be good for 60 to 90 days. Today, it’s really hard to get somebody to commit for 30 days. That changes a lot of dynamics.

It makes it more uncertain for the investor, the borrower and the lender. You need larger contingencies. There are cases where the entire project gets put on the shelf. Developers want to lock things in.

Q: Tariffs were used a lot more a hundred years ago. What’s different today?

Brown: A hundred years ago, tariffs were used pretty extensively. There was a longtime tariff on sugar and the U.S. sugar industry really benefited from that because it was prohibitively costly to bring in sugar from outside the U.S. But at that time, everybody was using tariffs, the U.S. and our trade partners. It was the norm.

But we’ve been living a long time in an era of a push worldwide for free trade. We have lots of multilateral and bilateral trade agreements. And there have been efforts by the (World Trade Organization) to push back on any one country that goes rogue and tries to impose tariffs so we have the GATT, the general agreement on tariffs and trade. So we’re an outlier in the fact that this administration is coming up with these new tariffs.

Most economists think free trade is better and tariffs are terrible.

Q: If the administration changes in 2020 and tariffs are no longer an issue, could the repercussions become permanent?

Brown: They could be and that is where the small firms can really get hurt. The small firms can’t wait. They may be driven out of the industry. The large firms will be left with a greater market share. You could see a decrease in competition. Even if things get reversed in 2020, the barriers for reentry will be too high.

They may not think it’s worth it to shift the supply chain once again.

Stapp: We talk about elasticity in the market — how far we can stretch prices before they no longer are acceptable. The problem is the only way that prices will go down now is if there’s a recession. If there’s not a recession, we’ve created the new baseline.

That’s unless you can decrease demand, where suppliers have no choice but to lower prices, and I don’t see that happening.

Top image by Pixabay

Mary Beth Faller

reporter , ASU Now

480-727-4503

 
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ASU urban climatologist reveals hottest and coolest spots on Tempe campus

June 14, 2019

Scientists' three-year heat study reveals how to best combine and place design features to cool pedestrian spaces

“To sit in the shade on a fine day and look upon verdure is the most perfect refreshment.” — Jane Austen

Just in time for face-melting season, a study of shade, heat and the best ways to cool pedestrians is being published by two Arizona State University scientists.

Urban climatologists Ariane Middel and Scott Krayenhoff did a three-year study of the Tempe campus, mapping out the three coolest (and hottest) spots on campus, taking readings even during excessive heat and record temperatures and discovering what works best to stay cool.

“It all boils down to shade,” Middel said. “To generalize, anywhere you have a huge tree that’s over grass. In terms of water use, it’s not the best solution, but it’s one of the coolest solutions. … Just putting grass doesn’t do much. Only planting grass without shade doesn’t make you more comfortable.”

In fact, one of the most miserable summer places on campus is surrounded by a lawn.

The three hottest spots on campus

1. At the center of the "X" sidewalks on Hayden Lawn (pictured above).

2. The walkway between Coor and Payne halls.

ASU hot spot: walkway between Coor and Payne Halls

3. The intersection of Cady and Tyler malls.

(“That was the worst,” said Middel, who would know.)

ASU's hottest spot: intersection of Cady and Tyler Malls

The three coolest spots on campus

1. The breezeway at Coor Hall.

Coolest spot at ASU: Coor Hall breezeway

2. Under the trees on the Old Main lawn.

Cool spot: under trees on the Old Main lawn

3. Under the giant ficus tree just west of the Memorial Union.

Cool ASU spot: under the giant ficus west of the Memorial Union

Next after shade as the best way to chill pedestrians comes cooling ground surfaces, like grass. Tree-shaded grass felt like 109 degrees Fahrenheit when the temperature was 119 F.

Vertical surfaces like hot building walls make it feel hotter. The walkway between Coor and Payne halls is completely concrete. The peak mean radiant temperature Middel and Krayenhoff measured there was 168 F.

The study’s findings give a look at how to best combine and place design features — green spaces, trees, and shade structures — to cool pedestrian spaces and can inform future construction and landscaping at ASU and in the broader community.

The city of Phoenix is struggling with how to cool the place down as heat-related deaths rise every year. In 2010 the city came up with a tree and shade master plan. Last year the city council voted to ramp up the plan by implementing a goal of having 25% of the city covered in shade by 2030. (Phoenix was at 12.4% in July 2015, according to officials).

Planting trees is great, Middel said, but they need to be planted where people walk. “That’s much more important than the number of trees,” she said.

The combination of rising temperatures, longer summers and the urban heat island effect are not pointing in good directions. Desert dwellers need to adapt.

“We’re expecting much warmer temperatures and for a longer time too,” Middel said. “A heat wave that might last two or three days now could potentially last for a week or so. … Temperatures we have here might occur elsewhere in the country. … It’s really important to think about how we can use urban form and design to try to mitigate that. We probably will not be able to reduce air temperature by that much, whatever warming we expect. It’s much more important what radiation hits your body — like shade versus sun, that’s much more important.”

To collect data on radaition, the scientists used a garden cart loaded with instruments like you’d find on a weather station. It measures air temperature, humidity, wind speed, wind direction and location with a GPS. The cart has 12 radiometers that measure incoming radiation from six directions. This includes shortwave radiation (think visible sunlight and UV radiation) and longwave radiation (the heat that gets emitted from hot surfaces). The shortwave and longwave radiation can be integrated into mean radiant temperature, the sum of all the radiation that hits a person’s body from 360 degrees. It’s a good measure of the human thermal experience in dry climates.

Ariane Middel with MaRTy mobile weather station

Assistant Professor Ariane Middel shows off MaRTy, the observational platform used in her newly released study. Photo by Charlie Leight/ASU Now 

The cart is named MaRTy, for mean radiant temperature. They took MaRTy on a campus tour on a record-breaking June day in 2016 when the National Weather Service issued an excessive heat warning. The airport reported 119 F that day. It was the fifth-highest temperature ever recorded in the Valley. Four hikers died that day.

They measured 22 locations with MaRTy every hour from 10 a.m. to 9 p.m. The locations are a combination of various sun-exposed and shaded areas (by trees, photovoltaic canopies, tunnels) with different ground covers (grass, concrete, gravel, asphalt). To stay hydrated, they drank all the sports drinks in one vending machine.

Urban planners and landscape architects will find studies like this useful in cooling down cities from the Persian Gulf to the American Southwest, Krayenhoff said.

"Pedestrians are likely to experience more extreme heat in the coming decades than they do today,” he said. “Common adaptation strategies may fall short in terms of their ability to offset projected air temperature warming. However, your exposure to heat as a pedestrian depends on the radiant environment in addition to air temperature, and by providing additional shade and cool surfaces in key pedestrian areas we may be able to keep pedestrians cool despite the coming heat."

Middel is an assistant professor with dual appointments in the School of Arts, Media and Engineering and the School of Computing, Informatics, and Decision Systems Engineering at ASU and a senior sustainability scientist in the Julie Ann Wrigley Global Institute of Sustainability.

Krayenhoff is now an assistant professor in the School of Environmental Sciences at the University of Guelph in Ontario, Canada.

Both authors are affiliates of the Urban Climate Research Center at ASU.

All photos by Charlie Leight, ASU Now

Scott Seckel

Reporter , ASU Now

480-727-4502