June 11, 2019 Tariffs: Bad for Manufacturers

US manufacturers dodged a bullet over the weekend as Trump suspended Mexican import tariffs, but the situation is far from over.

June 11, 2019

On May 30, President Donald Trump announced a five-percent tariff on all Mexican goods, effective on June 10, to increase five percent each month until it reached 25 percent. At issue was Mexico’s progress toward stopping illegal aliens from entering the United States. On June 8, those tariffs were indefinitely suspended with the announcement that the two countries had reached an agreement on future immigration steps.

With that latest development, U.S. manufacturers dodged a bullet that could have wreaked havoc on the U.S. and Mexican economies. Trump’s punitive tariffs on Mexico, having nothing to do with trade, may be over. But the tariff situation is not, with duties on Chinese and most steel and aluminum imports still in effect, and the possibility of more to come.

The uncertainty caused by the steel and aluminum tariffs is compromising activity in the U.S. metals sector, and is having a negative impact on manufacturing as a whole. U.S. manufacturers complain more about the Trump tariffs than other sectors of the economy and a growing body data shows that they are justified. The tariffs are hitting harder at manufacturing than elsewhere.

A study by the North American Association of Food & Equipment Manufacturers found that over 80 percent of respondents said the tariffs have negatively impacted their businesses, and over half reported that the steel and aluminum tariffs have impaired their ability to compete.

The National Association for Business Economics recently surveyed its members about the effects of Trump’s steel and aluminum tariffs on their first anniversary. Three-quarters of respondents in the goods producing sector—which includes manufacturing—reported the tariffs negatively impacted their companies, compared to only 28 percent of all companies. Two-thirds of respondents in the goods producing sector reported higher costs as a result of the tariffs—compared to 20 percent of all respondents—and 42 percent reported a negative impact on sales, versus 13 percent of all companies.

The Trump tariffs are forcing Americans to pay more for steel and aluminum and U.S. companies to navigate complex processes to source materials—but have done little to spur domestic production or to create manufacturing jobs. Steel production has increased only slightly since the tariffs have taken effect and aluminum production is still 40 percent below where it was in 2015. There are fewer aluminum production jobs in the U.S. than before the tariffs and steel mills have added only a few thousand jobs. As of April, the number of U.S. workers employed in the primary metals sector was up only by 1.2 percent compared to the year before and down 4.3 percent from April 2015.

Capacity utilization at U.S. steel mills has been up since the tariffs were put in place, a sign that prices should increase, but that has proved not to be the case. Steel prices have been stagnant and for some products on the decline, sinking as much as 19 percent this year.

Uncertainty, in a word, explains this unexpected situation. Much of the steel sold in the U.S. goes to middlemen who tightly manage inventories. Buyers at the steel service centers, as these middlemen are known, are not replenishing their inventories, fearing the consequences of buying into a falling market.

The same uncertainty is plaguing U.S. manufacturing as a whole. A recent Federal Reserve Bank of New York study found that the Trump tariffs cost companies and consumers $3 billion a month in additional taxes and companies a further $1.4 billion in losses. They also were causing the diversion of $165 billion a year in trade, leading to significant costs for companies having to reorganize their supply chains.

Speaking of which, U.S. exports have declined by 5.6 percent overall and exports of iron and steel have dropped 42.7 percent since the tariffs. And the Commerce Department announced last week that trade slumped in April—with exports down $4.6 billion and imports down $5.7 billion compared to March. That reflects, in large part, the blunting of economic activity brought on by the tariffs.

Some experts say the U.S. is due for an economic slowdown. Eventually one will come, as no recovery can last forever. But adding to the normal risks of the business cycle is the additional uncertainty of the Trump tariffs—an economic condition subject to the whims of a single individual, the president of the United States—a very dangerous situation indeed.

Peter Buxbaum, a columnist for Industry Today, is an experienced author of articles on business, technology, international trade, transportation, security, and legal issues. His work has appeared in Fortune, Chief Executive, Jane’s Defence Weekly and  Computerworld.

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