Why Do We Need This? cont'd
The Trump administration’s populist trade “strategy” was completely inconsistent, unpredictable and unstable.
Corporate America can survive bad policy as long as it is consistent. Companies that are responsible to shareholders, customers, employees and the communities they serve don’t have the luxury of playing chicken. They have to make decisions based on the facts as they are today. They have to decide how to deploy capital today.
The executive vice president of Columbia Sportswear, Peter Bragdon, summed it up when he said that companies are used to weathering bad public policy, but that “nobody is used to navigating public policy that is this horrible. It’s chaotic and incoherent. It’s not surprising that investments have slowed in the United States because of the chaos.”
In the very beginning of the Trump presidency, players in industries like steel, aluminum, and lumber were generally supportive of his tariffs because of what they viewed as unfair competition from companies that received subsidies from their governments (like China). Some of these companies believed that the U.S. tariffs would give them breathing room and more confidence to invest in their futures.
After all, if the volume of imports from countries imposed with U.S. tariffs is lower there should be more room for production in America to increase, right? Steelmakers were only using 78 percent of their capacity, and some mothballed plants have been brought back online to fill the void.
But — uh oh! — here comes that dang Butterfly Effect again. Those who did see an increase in production, thanks to the trade war, also saw higher prices thanks to (you guessed it) the same trade war!
This was particularly true for businesses that use metals — and those businesses account for many American jobs. So, these peeps got a double whammy: As their prices increased their global competitiveness decreased.
As a result, things like this started happening pretty quickly: The New York Times reported that “Century Aluminum, one of the few aluminum makers left in the United States, applauded Mr. Trump’s 10 percent tariff on aluminum when it was introduced. The company said the tariffs had made it possible to invest over $150 million to more than double output at its smelting plant in Hawesville, Kentucky.”
“Yet Century posted a $66 million loss last year, compared with a $49 million profit in 2017. A big reason for the loss was a sharp spike in the price of alumina, the substance that is smelted to produce aluminum. A major cause of the increase: Authorities in Brazil ordered a huge alumina producer to operate at half capacity after a spill...As of August 2020, Century had reported losses for nine straight quarters. The company hadn’t enjoyed an annual profit since 2017. In February 2021, Century reported a “net loss of $123.3 million for the full year 2020, a $42.5 million decline from the full year 2019.”
Soon after the Trump administration imposed the first steel and aluminum tariffs, Milwaukee-based Harley-Davidson announced it was shifting more production overseas, explaining that a rise in the price of their motorcycles “would have an immediate and lasting detrimental impact,” and that moving production overseas was “the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe.”
The Chief Executive Officer of Pittsburgh-based Alcoa, the country’s largest aluminum maker and importer, called the tariffs on imported aluminum a “significant” headwind. Alcoa then estimated that its operating earnings could take as much as a $100 million hit in 2018 alone. Indeed, six months later Alcoa’s aluminum division reported a fourth-quarter loss.
Caterpillar, the largest global machinery producer and a huge purchaser of metal, revealed it may have lost over $100 million in 2018 because of the tariffs.
In the quarter after the initial tariffs were announced, General Motors reported a $300 million increase in commodity costs, and Ford revealed that the tariffs resulted in $145 million in increased costs, an amount they estimated could reach as high rise as $600 million for the entire year.
General Motors said in a statement that there would be “less investment, fewer jobs and lower wages” for its employees. Less than six months later, GM announced it will close five North American facilities, as well as eliminate an estimated 14,700 jobs.
The trade war eventually caught up with Whirlpool, who originally loved the Trump administration’s tariffs on imported washing machines. Six months later, after their first quarter net income was down $64 million from the year prior thanks to the steel and aluminum tariffs, Whirlpool’s chief executive warned, “There continues to be uncertainty regarding potential future tariffs and trade actions. We’ll continue to monitor, evaluate and take the right action for our business.”
In the end, Donald Trump did the exact opposite of his promise to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.” Trade is just one more example of Donald Trump ripping things apart without being ready with a successful solution.
The few trade deals he did try to cut haven’t exactly set the world on fire. The North American Free Trade Agreement (NAFTA) went into effect on January 1, 1994. The U.S. State Department reports that “exports under NAFTA support more than three million American jobs. In NAFTA’s first ten 10 years, trade in goods among the three countries more than doubled from approximately $293 billion in 1993 to nearly $627 billion in 2003. In 2016, goods-trade between the U.S. and the two NAFTA trading partners totaled nearly $800 billion.”
In October 2018, the Trump administration announced that the United States, Canada and Mexico had reached a new trade agreement. Donald Trump signed the agreement on January 29, 2020. This new agreement is called the United States-Mexico-Canada Agreement or USMCA (how creative!). The new agreement does include stronger labor provisions and new rules for auto parts; updates rules for patents and intellectual property; and modernizes trade rules for e-commerce, digital products, and financial services — which is all positive. But, otherwise, the agreement is pretty much NAFTA.
Ditto with the bilateral trade agreements negotiated with Japan and South Korea, which were both so close to the existing agreements that many people didn’t even consider them new trade deals.
And then there’s China. Always China. Ultimately, Donald’s trade war with China did nothing but give China a huge trade surplus. In November 2020, China hit a record trade surplus of $75.43 billion, with 46.1 percent of that number — $51.98 billion — coming from America. Which was also a new record.
The Wall Street Journal reports that “the tariffs did succeed in reducing the trade deficit with China in 2019, but the overall U.S. trade imbalance was bigger than ever that year and has continued climbing, soaring to a record $84 billion in August as U.S. importers shifted to cheaper sources of goods from Vietnam, Mexico and other countries. The trade deficit with China also has risen amid the pandemic and is back to where it was at the start of the Trump administration.”
In addition, the WSJ reports that the trade war with China “didn’t achieve the central objective of reversing a U.S. decline in manufacturing, economic data show, despite tariffs on hundreds of billions of dollars of Chinese goods to discourage imports.” Nor did the trade war “achieve the central objective of reversing a U.S. decline in manufacturing, economic data show, despite tariffs on hundreds of billions of dollars of Chinese goods to discourage imports.”
Although the WSJ acknowledged that, as former U.S. Trade Representative Robert Lighthizer continually pointed out, there was a net gain of 400,000 U.S. manufacturing jobs from November 2016 until March 2020, they reported that “about 75 percent of the increase in manufacturing jobs occurred before the first tranche of tariffs took effect against China in July 2018, when annual growth in manufacturing jobs peaked and then began to decline. By early 2020, even before the pandemic reached the U.S., manufacturing job growth had stalled out, and factories shed workers in four of the six months through March.”
“An industry-by-industry analysis by the Federal Reserve showed that tariffs did help boost employment by 0.3 percent, in industries exposed to trade with China, by giving protection to some domestic industries to cheaper Chinese imports. But these gains were more than offset by higher costs of importing Chinese parts, which cut manufacturing employment by 1.1 percent. Retaliatory tariffs imposed by China against U.S. exports, the analysis found, reduced U.S. factory jobs by 0.7 percent.”
After all of the fits and tantrums and disruption and chaos, Donald undoubtably felt compelled to get something on paper with China, even if the deal ended up being a complete capitulation on his part (which it absolutely was).
On January 15, 2020, he and China’s Vice Premier Liu He, also their chief negotiator, signed the Economic and Trade Agreement Between the United States of America and the People’s Republic of China: Phase One.
In the deal, China “promised” to buy lots of stuff from us, but there is virtually no way to enforce this loose commitment. By the end of 2020, China’s purchases only reached 59 percent of the agreed upon target. There is the pandemic to consider, but the more likely scenario is that the United States never had the productive capacity to reach the very inflated targets in the first place.
Also, per the agreement, China isn’t required to buy U.S. products if “market conditions” are unfavorable or if they don’t approve of the quality, which makes the entire deal a virtual no deal. How do you say “gigantic loophole” in Chinese?
Worse, this deal still does nothing to address currency manipulation and/or China’s industrial policy. Even after this new deal was signed, Chinese imports from the United States are lower than they were before the trade war started, and our trade deficit with China is exactly where it was when Donald Trump took office.