I don’t often write about government policies that can impact your personal finances just because I am not here to write about what’s political in nature. Ok, tax reform and tax law being a major exception to that idea, but that is an essential part of our finances so I can justify it. But having said that, the news this week of the establishment of import tariffs in the U.S. has everyone in the finance world buzzing. Just when you thought it was safe to go into the water…pardon my “Jaws” reference but it does feel like there is a great white shark looming out there and it might be a bit dangerous right about now. Is a trade war looming?
I have literally re-written this post three times this week as new information and speculation has been surfacing every day about these proposals. Finally, the executive orders have now been signed.
Where Are We Right Now?
The economy and jobs picture seems to be humming along right now, but changes are happening. The new tariffs on foreign material steel and aluminum imports are going to affect industries that employ millions of Americans. Cars, beverage and robotics manufacturing are just three of the sectors that will be affected.
The tariffs recommended by the president and U.S. Commerce Department on aluminum and steel imported to the U.S. from abroad (worldwide) are intended to balance the trade deficit and use of foreign products by making American products more competitive. The idea is supposed to help American business create more jobs. But it could have the exact opposite effect and according to many economic advisors, it could also cause price increases and stimulate inflation. Last but not least, it might disrupt alliances among some of our best friends who trade with us on the world stage!
Note that the original announcement was a surprise to almost all of the administration’s economic advisors and that most aren’t happy about it. In fact, Gary Cohn, the president’s top economic advisor announced his resignation and most people believe it is primarily because of the tariffs which he adamantly opposes.
The details of the tariffs that President Trump surprisingly declared last week are now official. All steel imports will have a tariff of 25% added upon arrival here in the U.S. Aluminum will have a 10% tariff. The tariffs will go into effect in 15 days, and all countries will be subject to it.
Right now, NAFTA (North American Fair Trade Agreement) is being discussed and renegotiated, and the president says that if we reach a new fairer agreement that the new tariffs will not apply to Canada and Mexico who are both very important trade partners with us.
The president has also said that he reserves the right to add, subtract, or modify any and all tariffs with any and all countries as he sees necessary.
While it is surmised that these tariffs will prompt a reinvestment into the U.S. metals manufacturing sector, increase new employment, and re-establish new manufacturing facilities, some experts believe the tariffs will earn the ire of many U.S. trading partners. Our allies such as Canada, Mexico, and Germany initially railed against any proposed tariffs.
What if, as some economics and trade experts argue, they along with China and other countries decide to place tariffs on U.S. exports in retaliation? The European Union has already said that it will retaliate if and when we impose tariffs across the board to all. It can lead to an all-out trade war, a war in which everyone loses.
Retaliation is the biggest fear according to experts with the notion that tariffs will upset the current climate of international trade. The retaliation tariffs will lead to consumer price increases here at home and this spurs on inflation increases that already are occurring.
Inflation creep may have the undesirable effect of wiping out the new income tax decrease that many middle class workers just received in their February paychecks. That has put the fear of God into a lot of our politicians who thought that tax reduction would be their main campaign talking point in the mid-term elections. That may be in jeopardy now with these tariff actions.
It just doesn’t make a whole lot of sense to disrupt our relationships and hurt the economy in the hope of wiping out our trade deficit.
It’s Not a Zero Sum Game
There is no inherent evil in having a trade deficit. I have one myself with McDonalds. I buy lots of Big Macs each year from them and they buy nothing from me and I am perfectly happy with that. We’re both getting exactly what we want, aren’t we?
“Trade is not a zero sum game in which those who win do so at the expense of those who lose. It is, or at least it can be, a positive sum game in which everyone is a winner.” – Joseph E. Stiglitz (Nobel Prize Winner in Economics 2001 and former Economic Advisor to President Clinton)
Can U.S. Metal Manufacturing Really Make a Turnaround?
In the last 20 years, many aluminum smelters have closed their facility doors in the U.S. Currently, there are only two aluminum smelters running at capacity, with three others in the U.S. operating at partial capacity. On the other hand, steel has enjoyed a bit of a bounce back. Market leaders in metals, like Alcoa and Nucor, are optimistic at the possible shift as it will likely inject U.S. metals manufacturing with some desperately-needed enthusiasm. Share prices of U.S. steel and aluminum smelters surged following the initial mention of the proposed tariffs, but stocks overall have declined.
Nevertheless, U.S. Steel has already announced the re-opening of a steel plant in Illinois this year and Alcoa has announced plans to restart a smelter in southern Indiana by mid-2018. Southeast Missouri may find one of its dormant smelters resurrected, pending negotiations of an electrical supply contract with local utility company Ameren Missouri.
While the news for metals manufacturers leaves room for optimism, the state of metals manufacturing has been sorely outpaced by other producers like China, which operate many modern facilities that make the processes more cost effective. Without significant modernization efforts on top of the revitalization of metals manufacturing in the U.S., the long-term efficiency of these efforts remains to be seen.
There seems to be a parallel in comparing the planned resurgence of the steel and aluminum industries here in the U.S. with the idea of restoring the coal industry with the “clean coal” mantra that was touted previously by this administration. That hasn’t worked out as it was planned so it may foretell what will happen here.
What Will Be the State of the Robotics Industry Facing Metal Tariffs?
When it comes to the robotics manufacturing industry, the U.S. is a global leader in the field. Innovating creations in every sector from defense and medical applications to the automated manufacturing of confections, the state of robotics has never been more fruitful for the U.S. However, robotics is an industry that relies heavily on the supply of steel and aluminum as those two metals make up the bulk of manufacturing materials in building robots and robotic components.
The tariffs could significantly increase the costs of the innovations here, and while production gains momentum, our competitors elsewhere in the world will likely continue to make headway and eventually outpace the U.S.
Additionally, we will be forced to adapt to a much different landscape when it comes to materials availability. The imposing of tariffs could upset last year’s optimistic forecast that the metal fabrication in the robotics market is set to grow at an annual rate of 18.5% over the next three years.
How Will Beverage Brewers and Canners Be Affected by Metal Tariffs?
Breweries and canned food companies are two more industries that are expected to be affected by the import tariffs as they rely heavily on imported metals for packaging of their products. The resulting tariffs will not only raise the prices of canned goods, but could significantly increase the cost of beer. Some breweries may decide to abandon canning altogether and go to bottle-only production. The affected companies face major impact and that affects you.
The two different packaging systems require entirely different mechanical apparatuses, which cost tens, if not hundreds, of thousands of dollars to implement, operate, and maintain for brewers. The result is a more costly six-pack, despite what the container is made of.
The bottom line is this: protecting American industries isn’t a simple fix. It can mean that some will benefit like steel and aluminum, but others will suffer and some jobs will be lost. In the past, tariffs have produced more losses than growth and have even lead to recession and depression (check out what happened in 2002 under Bush and in the 1930’s during the Depression). Protecting America’s industries can wind up backfiring in the long run. The jury on what will really happen is definitely still out!
How do you feel about the tariffs? Are you concerned about jobs and inflation? Do you think that “protectionism” is a good economic strategy? Is it wise to pursue the elimination of a foreign trade deficit? How will you benefit or suffer from these tariffs in your personal finances?