A SCALE MODEL OF A TRADE CRISIS

Stacked U.S. levies on Chinese manufacturing and Canadian imports derail entrepreneur’s replica train business

Ontario-based Rapido Trains imports its products from China and makes 75% of its sales south of the border

Jason Shron has been anticipating doomsday would strike on Sept. 1. By then, he would have let go of all of his staff and be ready to shunt his model train company into a siding for a period.

That’s because Mr. Shron, president of Rapido Trains Inc. in Markham, Ont., imports his model trains from China and makes 75 per cent of his sales in the United States. In April, when President Donald Trump placed 145-percent tariffs on Chinese imports, Mr. Shron saw no way to continue selling in the U.S.

“It was awful. We knew then that we were unable to ship anything to the U.S.,” he said.

Then, on Monday, the two countries struck a deal to each roll back tariffs for 90 days, lowering the U.S.’s tariffs on China to 30 per cent from 145 per cent.

While this agreement may have delayed doomsday for Mr. Shron, he said it certainly hasn’t offered much relief. “You’d think my anxiety would lift, but no. Because, what’s next?”

Rapido Trains may be a Canadian business, but its fate rests in the crosshairs of trade tensions between the U.S. and China. Mr. Shron is one of many Canadian business owners who rely upon China for its supply of cheap, specialty manufacturing and the U.S. for its gargantuan consumer market.

In February, Mr. Shron bought his first U.S. warehouse to ship products from China directly to his customers there. This way, the invoice on the Chinese-made product, to which the tariff applies, is lower than if it had come from his Canadian warehouse. But faced with 145-per-cent tariffs, Mr. Shron said he had no choice but to pause all incoming orders.

With only 25 per cent of his sales coming from within Canada – most of which are already complete for this fiscal year – Mr. Shron said the math of keeping the lights on simply didn’t add up.

After telling staff a couple of weeks ago that layoffs were coming, he said morale plummeted and anxiety skyrocketed among Rapido’s 30 employees in the U.S. and Canada.

“I ended up becoming the company counsellor, because I would get counselling from my therapist and from my business coaches. Then, I would pass on all my counselling experiences to my employees,” he said.

Factory fires are an example of a scenario Mr. Shron said he has done disaster planning for. But the U.S. government placing a chokehold on his operations? That’s not something he ever expected.

“Your whole business can be upended, and it’s not because you screwed up. You didn’t make the wrong product. You didn’t do something wrong. It’s entirely out of your control,” he said.

When Mr. Trump first went into his tariff frenzy, accounting firm KPMG found that two-thirds of Canadian businesses would be affected by the 10-per-cent tariffs placed on Chinese imports to the U.S. That number is now tripled. Yet it’s still a reprieve from the much steeper levies before the recent 90-day pause kicked in.

When the tariffs on China were introduced in February, almost 90 per cent of the 250 business leaders surveyed by KPMG said they had or were considering diverting goods to countries not facing tariffs. However, since April, nearly every country in the world has become subject to a minimum 10-per-cent tariff on imports to the U.S.

In the model train universe, Mr. Shron said diversification away from China as a manufacturing base isn’t an option. He’s been working with his manufacturing partners in southern China for 20 years to make trains designed in Canada and the U.S.

There are a handful of North American model train manufacturers, he said, but their products don’t boast the same degree of detail. Plus, manufacturing in China is less expensive and more efficient, Mr. Shron said.

When Mr. Shron bought his warehouse in Buffalo, he said it felt as if Mr. Trump had been successful, in a way, in getting him to shift some of his business to the U.S. But that’s as far as he expects it will go, despite Mr. Trump’s rhetoric around tariffs bringing manufacturing back to the U.S.

“These jobs never existed in the United States. These are jobs entirely based in China. It grew there,” he said, referencing the model train industry.

The current 30-per-cent tariffs on Chinese imports to the U.S. are testing the limits of how much Rapido’s margins can be squeezed.

When the U.S. had 20-per-cent tariffs on Chinese imports, he said most of his customers kept ordering, unphased by the company’s 10-per-cent cost hike.

At 30 per cent, Mr. Shron said the company has decided to absorb most of the tariff, resulting in a similar 10-per-cent price increase to its customers.

While the decision was made to try to avoid layoffs and order cancellations, Mr. Shron said Rapido’s net profits will undoubtedly suffer.

“We’re still working in a time of total uncertainty.”