Builders anxiously eyeball U.S.-China tariff negotiations

The outcome could dramatically impact the U.S. construction market and professional liability insurance carriers.

Hundred of construction products needed to build homes and apartments in the U.S. are subject to the tariff. (Photo: Shutterstock)

With a March deadline rapidly approaching, the clock is ticking for the United States and China to come to a trade agreement. During their early December 2018 meeting at the G20 Summit in Argentina, U.S. President Donald Trump and Chinese President Xi Jinping discussed the contentious trade war between the two superpowers. While there were many storylines from the G20, for homebuilders, the stake of this meeting were enormous.

Last September, the U.S. imposed a 10% tariff on $200 billion in Chinese imports, a burden that impacted homebuilding disproportionately. To be precise, 600 of the 6,000 products that are subject to the tariff are materials needed to build homes and apartments. The total added cost of the tariff on housing products is $1 billion annually.

This 10% tariff was set to increase to 25% on Jan. 1, 2019, which would have meant a $2.5 billion annual tax for homebuilders. Fortunately, the two countries agreed to a breakthrough during their meeting, at least temporarily.

The U.S. and China agreed to temporarily hold off on increasing the tariff rate to 25%, giving the two sides 90 days from the beginning of December 2018 to negotiate a long-term agreement.

This March 2nd deadline is rapidly approaching, and finding a breakthrough is critical as American contractors, engineers and architects whose businesses rely on these imports are desperate for a long term solution, as are American families looking to buy, sell or renovate their homes. The short-term impacts of the Chinese tariffs are already being felt on homebuilders, and if a solution isn’t found during this negotiating period,  there will consequences for professional liability insurance over the coming months and years.

Short-term impacts: price spikes and escalation clauses

The immediate impacts of the Chinese tariffs, along with last year’s tariffs on Canadian lumber, are being felt already. Prices have spiked on key homebuilding materials such as cements, paints, windows, appliances, doors, cabinets, ceramic tiles, roofing materials and more. The burden of these additional costs has fallen mostly on contractors and homebuilders. While they are trying to take on the added costs, eventually these professionals pass them on to consumers.

We are seeing this movement already through the prevalence of escalation clauses, which enable contractors to charge more should prices of materials spike. Contractors are given a maximum notice of just 30 days when prices of key building materials increase, adding another layer of complexity and uncertainty to an already difficult situation.

While shifting prices to consumers may seem unfair, the reality is that contractors and housebuilders can take on only so much of the cost burden before the bottom-line impact is unsustainable for their businesses. The National Association of Realtors (NAR) reports that tariffs have already increased the price tag of a single-family home by some $9,000.

The good news is that homebuilding remains strong, and NAR predicts that construction next year should dip by only 1%. While that news is welcome in the short term, the consequences could be severe for homebuilders and consumers alike should tariffs continue and even spike over the coming months.

Long-term impacts: Cut corners and rising claims

If the U.S. and China aren’t able to come to a compromise during this 3 month negotiating period, the potential exists for long-term impacts on professional liability insurance. The biggest concern is that contractors and housebuilders will cut corners to avoid rising costs. Taking shortcuts that compromise the safety and durability of a project increases the risk of things going wrong down the line.

If these risks materialize, it will not be the first time we in the business of professional liability insurance will have seen this type of trend. During the construction boom of the early 2000s, contractors had so much business that they sometimes cut corners to keep up with the sheer quantity of work. Many of these corners cut were revealed during the housing downturn years later, when buyers tried to sell their homes.

Should history repeat itself, we could see a dramatic increase in claims against contractors, engineers and architects. And should the U.S. tariffs on Chinese imports cause a drop-off in home sales and sellers not getting the prices they ask for, we could see an increase in professional liability claims against real estate brokers and agents.

While the full impact of the tariffs on the U.S. construction business remains to be seen, the fact is that the longer the tariffs remain in place and their effects go on, the more risk contractors, engineers and architects are exposed to. While the extension that resulted from the U.S.-China meeting is cause for tepid optimism that long-term compromise can be found, a great deal of uncertainty remains. This uncertainty underscores the importance for homebuilding and real estate professionals of having strong insurance plans in place and, in doing so, being prepared to weather a trade war that could have long-term implications on U.S. businesses and consumers.

Dan Gmelin (Dan.Gmelin@argoprous.com) is senior vice president of Underwriting and Head of A&E and Miscellaneous Professional Liability at the international specialty insurer Argo Pro.

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