Evidence Mounting that Trump Tariffs are Working

September 9, 2019

The July trade data released on Friday by the Commerce Department provides evidence that the tariffs implemented by the Trump administration on Chinese imports are working.  The purpose of the tariffs, of course, is to shift manufacturing away from China and back to the U.S. to bolster the U.S. economy and manufacturing employment and break America’s dependence on massive budget deficits to counteract the damage done by trade deficits.

You won’t find much evidence of it in the headline number – the overall trade deficit – which shrunk marginally in July to $54 billion, a figure actually slightly worse than a year ago – $53.4 billion in July, 2018.  You have to look deeper at what’s happening with manufactured goods – not just “goods” in general, which the Commerce Department tracks and which includes trade in resources like oil and and farm products that have little impact on job creation.  The trade deficit in manufactured goods has been deteriorating rapidly for many years, interrupted only by the “Great Recession” in 2008/2009.  From January, 2010 to December of 2018, the deficit in manufactured goods nearly tripled, from $28.6 billion to $76.5 billion.  However, in the past twelve months, the deficit in manufactured goods has risen by only $0.3 billion – an actual decline when adjusted for inflation – and has actually fallen by $6.4 billion since the record of $76.5 billion set in December.

The impact on trade with China has been dramatic.  Through 2018, the deficit with China had been rising at a rate of about 10% per year, from $56.9 billion in 1998 to $419.5 billion in 2018.  In 2019, however, the deficit has fallen by 12% and the rate of decline is accelerating, though it ticked up slightly in July, likely the result of importers stockpiling goods in anticipation of the next round of tariffs.

The effect on manufacturing employment in the U.S. has been much less dramatic, though there has been some effect.  Manufacturing employment gains have been slow in 2019 after a strong 2018, but that may be about to change.  The Labor Department reported on Friday that, while the average work week in the U.S. rose a tenth of an hour to 34.4 hours, the manufacturing work week rose by 0.2 hours to 40.6 hours.  That bodes well for an overdue jump in manufacturing employment as employers look to cut overtime costs.  Also, although the headline number of Friday’s employment report – 130,000 jobs added in August (according the establishment survey portion of the report) – was below expectations for a gain of about 158,000 – what went unreported was that employment in the U.S. (as measured by the household survey portion of the report) rose by nearly 600,000!

And there’s this:  https://www.reuters.com/article/us-usa-economy-women/tight-u-s-labor-market-shrinks-gender-and-race-gaps-to-record-lows-idUSKCN1VR2JC.  In August, the gap in the labor force participation rate between men and women fell to an all-time record low and black unemployment also fell to an all-time record low.

Still, job gains in manufacturing at this point could be and should be much better.  What’s holding it back is Trump’s failure to expand his tariff policy beyond China, enabling companies to shift production from China to secondary suppliers in other countries – especially Mexico – where the trade deficit has jumped 24%.  Mexican workers have been the biggest beneficiaries of the tariffs on China, not Americans.

Trump can’t really claim that he’s “Made American Great Again” until manufacturing jobs come back to the U.S. in a much bigger way.  That can’t happen until he applies tariffs beyond China to include Mexico and imported autos from Europe, Japan and South Korea.  The results with China prove that they work.  Why is he holding back?

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Tariffs “a problem with no solution?”

August 31, 2019

https://www.cnbc.com/2019/08/30/basic-fun-ceo-jay-foreman-to-keep-production-in-china-despite-trump.html

In the above-linked article, Jay Foreman, CEO of Basic Fun, Inc., the toy company whose most well-known product is “Lincoln Logs,” whines that the tariffs on China have created “a problem with no solution.”  He complains that Trump’s order to American companies to find a new supply chain, preferably in the U.S., leaves him with no good alternatives.  If he moves production to another country, like India, he may soon face the same tariff problem there.  Move production back to the U.S.?  “There’s no labor here,” he says.

“I’m not really sure the American consumer is ready to start making toys in the kind of conditions you might see in factories in India, and there’s no labor here in the United States to manufacture toys,” said Foreman.

In addition to labor condition concerns, Foreman said that moving production to India, for example, is risky because Trump has already criticized that country’s trade practices.

I’m confused.  American consumers don’t make toys, especially in India.  Workers make things, not consumers.  And Indian factories are staffed with Indian workers, not American consumers.  I think he’s saying that American consumers might be turned off if they learned that the toys they’re buying are made in deplorable conditions.  I suspect that the Chinese factories aren’t that much different.

There’s “no labor here?”  What a crock.  The U.S. is awash in labor.  There are still ten million Americans who haven’t been put back to work since the “Great Recession” in 2009.  The only reason that unemployment in the U.S. is so low – 3.7% in July – is that these long-term unemployed have been factored out of the labor force.  This is why per capita employment remains approximately 2% below the pre-2009 level.  It’s the reason that the American economy is able to add 200,000 jobs every month during this period of economic expansion without any effect on unemployment and barely any upward pressure on wages.  The workers seem to appear out of thin air like magic every month.  It’s not magic.  The workers are here, waiting and eager to be put back to work.

Any time some company executive complains that they can’t find workers in the U.S., it’s because they can’t find workers at the wages they’re willing to pay, which is probably minimum wage or even less, if they could get away with it.  Offer $20 an hour, a more reasonable wage for the kind of skilled work required by manufacturing, and see how many workers show up at your door.  The impact on product prices would be minimal, and more than offset by rising wages.  After all, every consumer is either a worker or is supported by a worker.

Oh, by the way, it’s kind of ironic that Mr. Foreman complains that his toys can’t be made in the U.S. when the most iconic toy in Basic Fun’s line-up, Lincoln Logs – a toy inducted into the National Toy Hall of Fame in 1999, is actually made in Maine by Pride Manufacturing for Basic Fun.  And guess what?  American consumers still buy Lincoln Logs for their kids.  No one complains that Lincoln Logs’ manufacturing should be shipped to China so that they can save a few cents.


Trump Tariff Policy and the Risk of Recession

August 21, 2019

Early this month, Trump announced that a 10% tariff would go into effect on September 1st on all remaining imports from China.  (Half of Chinese imports were already subject to a 25% tariff.)  Stock markets plunged amid warnings of a global slowdown, inflation and the possibility of recession in the U.S.  Investors rushed to buy safe-haven bonds, sending the yield on 10-year bonds below that of 2-year bonds, producing the dreaded “yield curve inversion,” which has often been a harbinger of a looming recession.  So the warnings of recession intensified.  Every weaker-than-expected economic report blames the “trade war” and Trump’s tariffs, while every stronger-than-expected economic report – most notably a strong labor market and good GDP growth (the exact opposite of recession) is shrugged off as happening in spite of the tariffs and trade war.  The globalist media is desperately stoking fear of a recession in the hope of creating a self-fulfilling prophecy.

Is there actually a risk of recession related to Trump’s tariff policy?  You bet there is.  But the relationship is exactly the opposite of what economists and the media would have you believe.  Trump’s “slow turkey” approach to the use of tariffs – imposing them only on China – so far hasn’t yielded anything in terms of reducing the trade deficit and bringing manufacturing jobs back to the U.S.  Don’t get me wrong.  The tariffs on China are definitely working – reducing the trade imbalance with China by nearly 25% this year.  But companies aren’t convinced that this is anything other than a blip in U.S. trade policy or that it could extend beyond China.  So, instead of bringing jobs back to the U.S., it has shifted them to other overpopulated nations hungry for work.  It appears that countries like Mexico and Vietnam have been the big beneficiaries so far, where our trade deficit with each has grown by approximately 25%.

Our overall trade deficit hasn’t budged.  In  June (the most recent month for which data is available), our deficit in manufactured goods was $73.1 billion – the 2nd worst figure ever recorded and only $3.6 billion below the record set in December of ’18.

Trump appears to be walking a fine line, taking the “slow turkey” approach to tariffs to avoid roiling markets but, at the same time, not realizing any of the benefit of bringing back manufacturing jobs, leaving the economy dependent on deficit spending to counteract the drag of the trade deficit, making it susceptible to a recession.  It’s a huge gamble.  A recession will doom any hope of a 2nd term and, with it, any hope of sustaining this badly-needed turn in trade policy.

 


EU threat on auto tariffs

July 31, 2019

https://www.reuters.com/article/us-usa-trade-eu/eu-redoubles-threat-to-retaliate-if-us-raises-auto-tariffs-idUSKCN1UH1N5

The above-linked report was published a few days ago, but I can’t let it pass without comment.  It’s reported that the EU is threatening to retaliate with tariffs of its own if Trump were to push ahead with tariffs on EU auto imports.

“We will not negotiate under WTO illegal action. Nor will we go down the road of managed trade,” she (Sabine Weyend, the EU’s director general of trade) said.

If Washington pushed ahead with its threat to raise auto tariffs to 25%, Brussels would respond with tariffs of its own, resulting in a “lose-lose” situation for all involved, she said.

This is exactly the same approach taken by China, and the EU should consider how well that’s working out for them.  And the EU is in a far weaker position than China.  Unlike China, who supplies electronics and other consumer products for which new supply chains will have to be re-established in the U.S., the EU competes with the U.S. in products that are still manufactured here, like autos and parts.  A full one third of our trade deficit with the EU – approximately $43 billion – is in autos.  If tariffs make such EU imports more expensive, American consumers can instantly and painlessly switch to American brands.  The same is true for pharmaceuticals, chemicals, plastics and virtually everything else imported from the EU.  We don’t need their imports – we have it all right here.

The notion that a tit-for-tat tariff battle with the EU would be a “lose-lose” situation is laughable.  When you’re already losing, as the U.S. is with a $150 billion/year trade deficit with the EU, the only possible outcome for the U.S. – even if a balance of trade with the EU were reached through a total cessation of trade with them – would be a $150 billion boost to the U.S. economy, a huge win by any measure.

If the EU wants to avoid the loss it’d suffer, it’d be better for them to boost their domestic consumption instead of relying on manufacturing for export – the same remedy that experts have recommended for China.  Of course, with a population density nearly the same as China, they face the same problem:  per capita consumption that’s depressed by over-crowding.

Trump is continuing his “slow turkey” approach to restoring a balance of trade through the use of tariffs.  It won’t be long before he levies the long-promised 25% tariffs on the remaining half of Chinese imports.  I suspect that the EU will then be his next target.


“Slow-Turkey” Trade Policy

July 8, 2019

Like the animated “slow turkey” we’ve all seen on the TV ads for a quit-smoking medication, Trump’s trade policy is also taking the “slow turkey” approach.

As announced by the Commerce Department on Wednesday, the trade deficit jumped back up in May to $55.2 billion from $51.2 billion in April, but this was still below the peak of $60.8 billion in December.  (Here’s the full release from the Commerce Department:  https://www.bea.gov/system/files/2019-07/trad0519.pdf.)

More importantly, the deficit in manufactured goods also rebounded in May to $71.1 billion, up from $67.9 billion in April.  It too, however, was below the all-time record of $76.5 billion set in December.  Here’s a chart of the deficit in manufactured goods:  Manf’d Goods Balance of Trade.

Based upon these figures, it’s difficult to see that Trump’s policy of using tariffs to bring manufacturing jobs back to the U.S. is having any effect.  Look more closely, though, and you’ll find that things are starting to happen.  The deficit with China rose again in May, but to “only” $30.2 billion, from $26.9 billion in April and $20.7 billion in March.  But this rise follows a seasonal pattern.  The fact is that the deficit with China has been down from the same month in 2018 every single month so far this year.  The year-to-date deficit with China is $137.1 billion through May, compared to $152.2 billion for the same period in 2018.  And let’s not forget that the U.S. is now collecting a lot of revenue from half of Chinese imports – approximately $5 billion in May – an annualized rate of $60 billion.  If and when Trump imposes a 25% tariff on the other half of Chinese imports, that revenue figure will double to $120 billion per year and will further cut our deficit with China.

Yes, China is retaliating with tariffs of their own, and exports to China have dropped slightly, but imports from China have fallen much more – the net result being a lower trade deficit, which is a boost to the U.S. economy.  What about the stories about how bad America’s farmers are being hurt by this trade war?  Baloney.  Look at page 19 of the report.  Exports of “foods, feeds, and beverages” year-to-date is running almost dead even with last year.  Exports of soybeans, which get so much attention, are running 7% ahead of last year.  And overall exports are up by $2 billion from last year.

Recently, Trump announced in the wake of his G20 meeting with Red China’s dictator Xi that he is holding off the implementation of the 25% tariff on the remainder of Chinese imports that he has threatened, pending a new round of trade negotiations with China.  We can see a pattern emerging in Trump’s style of trade policy.  He’s all warm and fuzzy when meeting with global leaders like Xi, then takes the tough action when the lower-level negotiations don’t measure up.  Maybe it’s a smart approach, effectively inoculating the business world against the Chicken Little, “the sky is falling” dire warnings of trade war consequences.  The unfounded fears dissipate when the trade war is rolled out slowly and nothing bad happens.  The free trade fear mongers are losing credibility.  Each new round of tariffs gets more of a ho-hum response.

Who’s been the biggest beneficiary of the tariffs on China so far?  Mexico.  While the trade deficit with others like Germany and Japan is either stagnant or declining (South Korea), the deficit with Mexico is growing rapidly as manufacturers who have been leaving China in droves (a few examples of which are reported here:  https://www.reuters.com/article/us-china-strategy-tech/hp-dell-other-tech-firms-plan-to-shift-production-out-of-china-nikkei-idUSKCN1TY14G) look for their next best (low cost) solution.  Some manufacturing is coming back to the U.S., but a lot is going to Mexico.

Under current NAFTA (North American Free Trade Agreement) rules, that may look like a smart move.  But that landscape is changing too – in “slow turkey” fashion.  A new agreement has been negotiated and is pending approval by Congress, and Trump has repeatedly threatened tariffs on Mexico imports, most recently in his effort to force Mexico to take a tougher stand against Central American immigrants.  Those companies moving to Mexico now may be throwing good money after bad and regret not facing the inevitable – that America’s tolerance of perpetual, huge trade imbalances has reached the end of the line.

This “slow turkey” approach to trade policy is frustrating for a “cold turkey” like me.  The “cold turkey” approach would already be yielding bigger benefits for American workers.  But I’ll concede that a “slow turkey” approach may be more sustainable in an environment where free trade globalists still command the attention of the media and are influential in what happens in global stock markets.  The benefits for workers may not be sustainable if investors are taking it on the chin.

It looks like the “slow turkey” approach is just beginning to show positive results.  The American economy, including the manufacturing sector, is doing well while others are faltering.  If this approach de-fangs the critics as their trade war hysteria falls flat, and the political climate becomes favorable for an 8-year “slow turkey” transformation of trade policy instead of a 4-year “cold turkey” that ultimately yields nothing more than a lame duck dead turkey, then I’m all for it.

 


Trade Deficit “Unexpectedly”(?) Narrows

June 8, 2019

https://www.fidelity.com/news/article/top-news/201906061158RTRSNEWSCOMBINED_KCN1T71LA-OUSBS_1

As reported in the above-linked Reuters article, America’s trade deficit fell slightly to $50.8 billion in April.  More importantly, the deficit in manufactured goods fell to $68 billion, it’s lowest level since June of last year.  The decline was due to a drop of $5.9 billion in imports, partially offset by a $5.2 billion drop in exports.

The reporting in the article seems to be intentionally misleading to promote a pro-free trade, pro-globalism agenda.  First of all, the article reports that the deficit “unexpectedly narrowed.”  Why “unexpectedly?”  I, and anyone who understands how tariffs work to restore a balance of trade, have been expecting it for months.

Then there’s this:

“U.S. trade with the world is slowing dramatically and the odds are rising that the economy is going to take a big hit,” said Chris Rupkey, chief economist at MUFG in New York.

“Globalization and expanded trade between nations benefited everyone and now the reductions in trade volumes between nations are going to subtract those benefits worldwide from everyone.”

The facts are that the economy is actually doing very well, especially in the U.S.  Globalization didn’t benefit everyone.  America’s manufacturing sector was devastated, turning a nation that was an industrial powerhouse into a skid row bum, economically speaking.

And this:

The politically sensitive goods trade deficit with China surged 29.7% to $26.9 billion. The gap with Mexico fell 14.1% to $8.2 billion in April.

Well, yeah, the deficit with China rose in April from March, but March was the lowest deficit with China in five years.  The Reuters article failed to mention that the 3-month trailing average deficit with China, which factors out month-to-month volatility, fell to its lowest level since April of 2014.  The data about Mexico is also misleading.  While the gap fell with Mexico in April from March, the 3-month trailing average rose to its highest level ever as manufacturers flee China for Mexico to avoid tariffs and to reduce their high shipping costs.

The tariffs on China are working, a fact more accurately covered in this article:  https://www.reuters.com/article/us-usa-trade-mexico-manufacturers/under-tariff-threat-mexico-less-attractive-to-companies-avoiding-china-trade-war-idUSKCN1T82HB.

Take the recent experience of outsourcing firm Tecma Group, which saw a surge in interest from companies mulling a move to Mexico as Trump raised tariffs to 25% on $200 billion of Chinese goods.

Tecma, which manages some 75 factories in Mexico, had been approached “every week” by companies selling items from furniture to ink pens seeking a pathway out of China and into Mexico, according to Alan Russell, its chief executive and chairman.

…  data showing Mexico emerging as the top U.S. trading partner as China exports less to the United States, combined with anecdotal evidence, suggest a significant trend.

… “Whatever we are doing in Mexico is for our company’s long-term strategic growth … If we produce in Mexico we’ll a save a lot on freight and it will reduce the time for delivery. It’s a huge advantage,” said (Fuling Global Inc.) CFO Gilbert Lee.

… Similarly, camera maker GoPro Inc decided in early May to move most of its U.S.-bound production to Mexico from China to “insulate us against possible tariffs,” Chief Financial Officer Brian McGee told investors at the time.

… In fact, Mexico overtook both China and Canada in the first quarter of 2019 to become the U.S.’s top trading partner in goods, according to U.S. Census Bureau data.

This is proof positive that the tariffs on China are working, forcing manufacturers to flee in search of a better deal.  The fact that, for now, they’re finding a better deal in Mexico instead of returning immediately to domestic manufacturing in the U.S. isn’t all bad news.  Mexico is a nation with only one tenth of the population of China, and with a GDP (gross domestic product) per capita that’s approximately 25% higher than China’s.  That means that Mexico doesn’t have enough slack labor force to take on all of the manufacturing currently done in China.  The demand for labor will quickly drive wages that are already higher in Mexico than in China even higher, to the point where manufacturing in Mexico has no advantage over the U.S.

The data shows that the tariffs are really beginning to work.

 

 

 


Tariff news coverage makes me want to scream!

May 13, 2019

The simple-minded, sound-byte news coverage of the tariffs on China just makes me want to scream.  “Trump lied!  China isn’t paying for the tariffs!  American consumers are going to pay!  It’s going to cost every household $1,000 per year in higher prices!  A million jobs will be lost! China will retaliate with tariffs on American imports!  American farmers are getting killed by the loss of exports to China!”

I could go on.  The list of ways in which the sky is falling is endless as every business failure or challenge is now blamed on the tariffs on China.

The problem with the warnings that I’ve singled out above is that there is some truth to all of it – but only a half-truth.  Less than half, actually.  But the media sees an opportunity to stir up Trump hysteria, and hysteria always stirs more interest than factual, balanced reporting.  It’s the very reason that the evening news on every channel begins with a frantic proclamation of “BREAKING NEWS!!!” delivered breathlessly by a news anchor in a tone of voice that sounds like he/she just stopped in to the studio while fleeing the apocalypse to warn us all to run for our lives.  Then you find out it’s not breaking news at all, but some damn thing that happened earlier in the day – something of little significance to 99.9% of the viewing audience – that some reporter just found a new little twist on the story.  And so it is with the story about the tariffs on China.

So I’m here to lend some balance to the tariff story.  Let’s take the above claims one-by-one.

  1.   “Trump lied!  China isn’t paying for the tariffs!  Etc.”  Maybe he did mislead us a bit with this one, as it actually is the importer that will pay the tariff, not the Chinese exporter.  However, in some cases, those are one and the same, since Chinese exporters have set up importing companies in the U.S.  Regardless, China will pay in a big way and China will be hurt badly, much worse than the U.S.  Chinese companies will be pressured to cut their prices to offset the tariffs paid by the importers, and they will, in many cases perhaps offsetting the entire tariff.  They may actually sell their products below cost, wiping out all profit for the Chinese company and all revenue that the Chinese government would have collected.  Chinese exports will fall dramatically as American companies find new, cheaper sources for their products.  Unemployment and civil unrest in China will rise.  China’s ability to fund its military expansion will be badly crippled.
  2. “American consumers are going to pay … $1,000 per year in higher prices!”  Yeah.  No one has ever denied that.  But what’s missing here is the fact that someone is going to give you $2,000 per year – maybe more – to cover it.  Who’s going to do that?  Your employer.  If not your current employer, your new employer – the one who just built a factory in your town to make some product that’s now too expensive to be imported from China.  Uncle Sam will be chipping in too.  Now that he’s collecting revenue from importers – that is, from people who still insist on buying the now-expensive Chinese imports, he has room to cut your income taxes without blowing up the federal budget.  Don’t like paying the tariff on the import?  Then don’t.  Buy the cheaper American-made alternative.
  3. “A million jobs will be lost!”  This one isn’t even a half-truth.  It’s an outright lie perpetrated by globalist economists who don’t like American efforts to restore a balance of trade.  They arrive at this figure by assuming that consumers won’t be able to afford the higher prices and will stop spending, forcing retailers to lay off workers throughout the supply chain – shipyard workers, truck drivers, warehouse workers, people stocking shelves and working cash registers.  They hope it won’t dawn on you that people will immediately seek out cheaper alternatives and will quickly find them in new products provided by new companies and entrepreneurs who have seized on the opportunity.  Truth be told, if the trade deficit with China were completely eliminated, as it will be if both sides escalate their tariffs higher and higher, the U.S. would add several million manufacturing jobs to its economy, not to mention the jobs involved in building that manufacturing capacity.
  4. “China will retaliate with tariffs on American imports!”  Maybe, but not if they’re smart.  Don’t forget that the real prize here to restore a balance of trade with China.  Any combination of imports and exports that gets us to that point yields the same positive benefit for the American economy.  If China wants to choke off U.S. exports altogether, then we can achieve a balance of trade by completely choking off Chinese imports.  We’re still the big winner and China will be an even bigger loser.
  5. “American farmers are getting killed … !”  Hogwash.  While farmers’ exports to China may be taking a hit, the free-trade globalists don’t want you to know that farmers are more than making up for it by increased exports to other countries.  It’s easy to verify this for yourself.  Just look at the trade report published monthly by the Commerce Department.  Farm exports (including the much-publicized soybeans) were actually up in 2018 and year-to-date in 2019 are running ahead of 2018 exports.  I also read a story that blamed the demise of family farms on the China tariffs.  More hogwash.  Family farms have been vanishing for decades, unable to compete with the huge corporate farms that are swallowing them up.

Higher prices that are more than offset by higher wages are a good thing, not a bad thing.  That’s the very mechanism that has enabled our standard of living to advance.  We all pay higher prices for every product than we did in the past, but we have a higher standard of living because the demand for labor has driven our wages higher.  “Wages aren’t higher today,” you may say.  Yeah, and why is that?  It’s because of our huge trade imbalance, the very thing Trump is tackling with these tariffs.

If all Americans understood the truth about trade and the damage that huge trade deficits do to an economy, we’d all be cheering for Trump – Republicans and Democrats alike.  We’ve been in a trade war for decades and have been losing badly.  Finally we have someone willing to take up the fight.  That’s the truth.