A Pot-holed Road to Tariffs

Terry H. Schwadron

July 3, 2018

The tariff police are supposed to move in on $34 billion affecting 1,102 worth of Chinese imports next week, just as more targeted tariffs have begun towards the European Union, Mexico and Canada. Canada has launched its own billion-dollar tariff program in response.

Naturally, there is a bit of apprehension about how it all is supposed to work and whether the results will be good for Americans, as President Trump promises, or actually bad. Some of the results are counterintuitive, but the wider the tariff pushback becomes, the more unpredictable the results.

Indeed, China this weekend actually dropped its tariffs eight percent, probably just to tweak the Trump approach.

The obvious immediate answer is that it depends on whether the tariffs interrupt your corporate supply lines or whether China’s planned countermeasures are aimed directly at you. The more long-range answers are a little more difficult to gauge, of course, and represent a sliding scale on whether the Trump administration gets yet more aggressive or starts to back off as Americans see what is happening.

· Harley-Davidson. In response to European counter-measures, Harley-Davidson announced it would be moving some U.S. motorcycle manufacture overseas to avoid the tariffs — — the absolute opposite reaction that Trump wanted to result from his aggressive stance.This seemingly normal business response has drawn a tantrum from the president, who sees Harley-Davidson, the quintessential American company as suddenly unpatriotic. Worse, the president hinted that Harley-Davidson was being impatient, and that the tariffs might eventually go away.

· General Motors said in memos to the Commerce Department disclosed this weekend that tariffs would add thousands of dollars in costs to consumers, slow sales and likely result in layoffs.Endorsing this view was Polaris, maker of missiles.

· U.S. Steel acknowledged that six plants Trump said would be opening indeed are not, though the company did re-open two production lines at an existing plant adding about 500 jobs. Still, this is the balance for tariffs on foreign steel.

· Cheese. Wisconsin dairy farmers, upset by Canadian resistance to oversupplying their markets and facing European and Chinese tariffs, say they will have trouble finding foreign markets and may just spill their milk onto the ground.Obviously, this is not the result Trump intended.

· Deficit. Larry Kudlow, chief economic adviser, claimed falsely in an interview that deficits are falling rapidly because of tax cuts. Indeed, they are increasing, something that may worsen as a result of tariffs. Kudlow amended his remarks to say he was discussing future deficits.

For openers, the question is whether as a strategy,Trump can gain leverage towards a better trade deal with China or whether this standoff will trigger a growing trade war that some say we already have entered. Of course, China is merely the biggest target, but Trump has simultaneously attacked Canada over dairy product costs, and Europe over steel and aluminum products, to be followed by car tariffs that would add another 25% more to the cost of European imports, including, especially, it seems European cars, which is strange, because many are assembled in the United States.

As things stand now, Trump threatened China with selected tariffs mostly on electronic parts and pieces that various American companies likely need as part of their guaranteed supplies or electronic goods that are available outside of China. Trump’s claim was that China is maintaining a positive trade balance of upwards of $500 billion a year with the United States (others peg that number closer to $375 billion in manufactured goods), but also that China insists that U.S. manufacturers give up industrial secrets and manipulates currency to do so. Trump also vowed to soften the punishment for Chinese telecom company ZTE .

China responded by setting forth an equal number of tariffs mostly on U.S. soybeans, liquor, jeans and other products. China offered to buy an additional $70 billionof American farm, energy and industrial goods, but the United States rejected that offer, and there are no more talks right now.

And there are divisions in the White House team among globalists, like Larry Kudlow, the chief economic adviser, and Peter Navarro, a nationalist who advises on trade.

So what’s ahead:

· As in all negotiations, someone will have to blink. If Trump settles for a limited deal, he could look less than the strongman he wants to project. Of course, trade is not totally divorced from other security issues, and the U.S. needs China’s help to address North Korean nuclear weapons development, and the handling of the U.S. debt.

· Now, Trump says he will add new export controls and investment limits designed to curb China’s access to U.S. technology.

· Administration officials insist that they can outlast China in a trade war because Chinese exporters sell almost four times as much to the United States as Americans sell to China. But the Chinese have a variety of ways to harass U.S. companies operating in China and can influence car-buying by citizens.

The longer that a trade dispute goes on, the more products and industries will be affected. For about half the items targeted in Trump’s tariffs, China is providing less than 10 percent of goods. Some of the most immediate industries that could face challenges are these:

· Light-Emitting Diodes, LEDs.The United States imported $637 million worth of them from China last year, more than any other country. But Japan and Malaysia exported an additional $593 million in LEDs in the United States combined. Obviously, U.S. manufacturers will be looking to buy in countries not paying the 25% tariff.

· Boat Makers. The tariffs target electric motors used for boats. Unlike LEDs, companies match these motors with specific molds and patterns that make it more difficult to replace the products. Change will cost thousands of dollars. The tariffs are estimated to add about $2,000 to the cost of 14-to-16-foot pleasure boats.

· Flat-screen TVs disappeared from the list of tariffs. The liquid crystal components are made mainly in Japan, South Korea, Taiwan and China. The final assembly is done in many more places; many larger TVs sold in the United States are assembled in Mexico. Manufactuers like LG, Sony and Samsung can avoid having the Chinese tariffs pinch by shifting more of their assembly to Mexico could allow them to avoid the tax even if it is expanded to encompass their products. However, Trump’s attack on NAFTA might just restore those tariffs on imports from Mexico.

In other words, the broader the trade conflicts, the less maneuvering room employers and consumers will have for adjustments in supply lines.

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