How Tariffs Are Benefiting US Manufacturing

October 28, 2020

By Jeff Ferry, CPA Chief Economist

Last year, the US raised the share of domestic demand for manufactured goods met by US production for the first time in six years.

The CPA Reshoring Index shows a positive score of 59 basis points (bp) for 2019. It’s only the fourth positive figure since the data begins, in 2002. Equally important, the data for the first two quarters of this year shows that we took another 120 basis points away from importers by the end of Q2, despite the disruption caused by the pandemic. The domestic market for manufactured goods, worth $7 trillion last year, is the most important market for US manufacturers.

Neither a Biden nor a Trump administration should reject tariffs as part of a whole-of-government strategy to continue reshoring industrial supply chains that provide the incomes needed to reduce inequality, the goods we need and the innovation for future prosperity.

Tariffs are a big part of the driver of this success for US manufacturers. Beginning in January 2018, the Trump administration levied tariffs on a series of industrial sectors, followed by tariffs on over half of US imports from China. The tariffs ranged from 10 percent to 25 percent on most of the affected imports. That margin gave domestic producers a cushion of protection against cheap, subsidized foreign imports. The China tariffs were relatively small in relation to the size of our economy but were concentrated in durable goods. The CPA Reshoring Index shows that the biggest reshoring impact occurred in durable goods, even as net offshoring continued in the tariff-free nondurable goods.

Further, these actions gave manufacturers a psychological boost that maybe, just maybe, we would now see a US government dedicated to supporting US manufacturing instead of sacrificing it at the altar of cheap consumer goods. This is important because businesses want to make long-term deals with suppliers. The prospect of continued tariffs gave US businesses a strong incentive to seek out US suppliers.

Perhaps the best indicator of the tariff impact is in our Reshoring Index for the important Computers and Electronics sub-sector, where China is the largest source of imports. The index for Computer and Electronics was a positive 402 bp—in other words, import penetration in this sector fell by more than 4 percentage points, down to 67.6 percent in 2019. In fact, by Q2 of this year it was down further, to 61.2 percent, its lowest level in a decade.

The tariffs have unleashed a wave of investment in the tariffed sectors. Steelmakers including Nucor, Steel Dynamics, and Big River Steel are building new steel mills from Florida to Arkansas to Texas. All of them are in regions (“flyover country”) that have been starved of new investment for decades and badly need the investment--and the jobs that come with it. In washing machines and solar panels, we’ve seen a wave of investment, again in depressed parts of the country, and much of it from foreign-owned companies that take the long-term view that the US is a market they want to manufacture and sell in. From zero a few years ago, we’ve gone to about a 30 percent market share for US producers in sales of solar panels.

Jobs, Jobs, Jobs

The improvement in the fortunes of the manufacturing sector has brought with it a surge in jobs. In the three years from December 2016 to December 2019, the US added 510,000 manufacturing jobs. It’s the first time this century that the US added more than half a million manufacturing jobs over three years.

Growth in manufacturing and the entire US economy in the years up to December 2019 is also reflected in family income data. The Census Bureau recently reported that US real median family income reached $68,703 in 2019, up an impressive 6.8 percent over 2018.

Along with the growth in family income came lower unemployment rates. Last December, unemployment hit 3.5 percent, its lowest level since 1969. Also last year, the African-American unemployment rate fell to 5.5 percent, its lowest level since records began for the group. The same effect was seen in the median family income data, where black real median family income rose last year by 7.9 percent, a full two percentage points faster than the growth in white family income. Black family income still trails the figure for whites by $27,000, so more work needs to be done. But African-Americans made up some of the gap in 2019, and part of the reason is that they are over-represented in the lesser-educated sectors of the workforce that have benefited from the tariffs.

Objections, objections, objections

As an economist, I can’t go to any professional gathering without being buffeted by loud, strenuous, emotional objections to my explanations of how tariffs are delivering economic growth. The economics profession is united in believing that free trade is wonderful, and they will defend that view until the last manufacturing job has left these shores and every American is employed serving Starbucks lattes to professors of economics. Let me deal with some of these objections right here:

What about the COVID pandemic? Haven’t we lost millions of jobs?

Yes, that’s true. Our economic performance since March 2020 has been dismal. But this is no reflection on economic policies. The skyrocketing unemployment in the spring, and the ongoing failures of large and small businesses are a result of conscious decisions, still going on today, to shut down parts of our economy to stop the spread of the pandemic. Balancing the interests of public health and a strong economy is a difficult decision. No country has it exactly right and many countries are still seeking the right balance. But that is no reflection on what is the right long-term economic policy for the US.

What about inflation? Don’t tariffs raise consumer prices?

No, actually they don’t. In the most recent (September) data from the Bureau of Labor Statistics, the annual rate of core consumer inflation came in at 1.7 percent. Inflation has hovered around 2 percent for most of the past decade and tariffs have not made a noticeable dent in those figures. Tariffs have had little impact on the prices of tariffed goods. Or to be more specific, we often see a brief surge in prices in the first couple of months after a tariff is announced, as hoarding and rush purchases bid up prices. But that quickly subsides and prices fall back to normal levels. Steel prices today are LOWER than they were five years ago. Same for solar panels and the same for washing machines. Prices are not determined by tariffs. They are determined by the forces of supply and demand in an industry. The US, with its $20 trillion economy, is big enough that if we exclude every single importer, we will still have enough competition in almost every industry to guarantee competitive prices.

Aren’t US consumers paying for the tariffs?

No, they are not. One of the biggest markets for steel and aluminum is the auto industry. According to the latest consumer price data, new vehicle prices are up only 1 percent on a year ago, less than the increase in inflation or the average weekly wage. Apparel from China is subject to 25 percent tariffs, yet US apparel prices are today 6 percent LOWER than they were a year ago, according to the BLS.

What about retaliation? Isn’t that hurting US farmers?

China has implemented retaliation against US exports, particularly in agriculture. This has hurt US farmers, although the Phase One agreement has seen China ramp up its purchases of soybeans and other crops. The fundamental problem our farmers have is that they are selling products where global supply is rising faster than global demand. The US government needs to develop a plan that addresses fundamental imbalances in agriculture, particularly for family farmers, who are hit by the double whammy of foreign production depressing prices and oligopolistic food processing giants taking a growing share of the available revenue.

But in international trade the US needs to stand firm against retaliation and do the right thing for American workers and their families. The fear of retaliation is never a good reason for abandoning a policy when it is the right thing to do.

But isn’t our trade deficit worse now than ever? And what about our deficit with China?

Our 2020 trade patterns reflect the distortions and upheaval of the COVID pandemic. Our trade deficit in goods for the first eight months of the year is slightly smaller than it was in the first eight months of 2019, while our goods and services deficit is slightly larger. In 2019, our trade deficit was $577 billion, slightly improved from the 2018 figure of $580 billion. And that’s despite growth in gross domestic product of 4.0 percent (2.2 percent in inflation-adjusted terms), which means that the trade deficit fell as a share of GDP.

As for China trade, alarmists are citing the high rate of China imports in recent months, which is the natural consequence of Chinese production coming back online after months of minimal production earlier this year due to the pandemic. However, for the first eight months of this year, our trade deficit with China is down 16.4 percent from the same period in 2019. And that’s after the 2019 bilateral deficit fell 17.6 percent from the 2018 level. The China tariffs are achieving their objective of making the US less dependent on China and forcing China to find other foreign economies to exploit if they want to continue their beggar-thy-neighbor growth.

But don’t tariffs make an economy less efficient? (That’s what I was taught in Economics 101!)

OK, pay attention. The theory of free trade as developed by David Ricardo in 1817 says that free trade will move workers out of less competitive industries and into more highly productive jobs because foreign competitors will produce those goods more competitively. However, this view is untrue for high-wage economies like the US. In fact by the late 1800s, rising wages in England were beginning to prove Ricardo’s theories wrong, which is why the great British economist John Maynard Keynes dismissed Ricardo’s theories as “pseudo-arithmetic.” If workers are displaced and move to lower-pay jobs, then an economy becomes less productive, not more. This is the situation the US and other high-wage economies face. Our high-wage industries are the ones under assault from low-wage nations and in the case of China, from nations that engage in government-subsidized exports, an undervalued currency, wholesale intellectual property theft, the use of forced labor from a terrorized Uyghur population, and a dozen other underhanded tricks and ploys.

In fact, tariffs alone are not enough to put the US economy back on a high-growth path. In today’s world, China and other countries have higher tariffs than the US and also employ a comprehensive set of policies to grab large shares of the most desirable industries. A nation’s long-term economic growth is driven by its possession of high-growth industries. Tariffs have enabled us to begin to turn around the growing import penetration in manufacturing we’ve suffered most of this century. But more policies will be necessary. We need to remove the handicap of a US dollar currency that is some 25 percent overvalued. We need to take positive action to re-shore vital industries like pharmaceuticals. We need to consider reversing our low tariff policy to protect a broader array of industries. And we need to ensure that our growth industries have an incentive to invest here in the US, with a market that will be kept free of foreign predatory practices.

One steel company provides a good illustration of the positive environment created by tariffs. Cleveland-Cliffs, a large iron miner in the Upper Midwest, this year acquired two large steelmakers, AK Steel and the US operations of Arcelor Mittal for a total of $2.5 billion, to become the largest supplier of steel to the US auto industry. We now have an aggressive, high-investing growth-oriented steel company as the lead supplier to our all-important auto industry. In an investor conference call last Friday, Cleveland-Cliffs CEO Lourenco Goncalves told investors of the company’s healthy second quarter results despite the pandemic, and of his investment plans this year, which include $500 million of capital spending on upgrades including robotic operations at its steelmaking facilities, fully automated manufacture of automotive parts, high-tech mines, and environmentally conscious steelmaking using electric arc steelmaking and clean-burning iron ore pellets.

With imports down and capacity utilization up, the US steel industry is healthier today than it has been in years. Nations have choices as to which industries they want to invest in for their employees, their customers, and their investors. But especially their employees.

Here’s an example: The largest private employer in the US is Walmart. Last year, based on its federal filings, Walmart paid its median employee $22,484. It had 2.2 million employees.

In contrast, Cleveland-Cliffs has only 2,371 employees, employed mostly at steelworks and iron ore mines in the Midwest. It paid its median employee $104,333 last year. That’s more than four times the Walmart median pay.

You don’t need a college degree to do many of the jobs at either company—which is a good thing since the majority of working Americans do not have a college degree. From the point of view of broadly-based prosperity and economic growth, we need more employees in steel and not so many in big-box retail. Tariffs are one key element of the industrial policies that can make that happen.

There’s one more statistic from the federal filings that is relevant: at Cleveland-Cliffs, CEO Goncalves earned $16 million last year. That’s 154 times what the median employee earned, and some of us might think that ratio is too high.

At Walmart, CEO Doug McMillon earned $22.1 million, 983 times what his median employee earned. Some people might think one man earning about as much as 1,000 hard-working retail staff is not a recipe for social peace—or for the egalitarianism for which the United States was once known.








manufacturing Trade and Tariffs

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