What Manufacturers Should Know About Tariffs

In March 2018, the United States imposed tariffs and quotas on imports of specific steel and aluminum products from all countries with the exception of Australia.  Recently, the United States also imposed tariffs on a sizeable portion of imports from China. The Trump Administration created a list of $300 billion dollars worth of Chinese imports, with some with tariffs up to 25%. These tariffs have had an impact on United States producers and consumers as a consequence. There are many different outcomes in the trade war with China, we will look at the short term, long term, and immediate effects of the trade war.

 

What is a Tariff?

Tariffs add a cost to any product, and the government imposes this cost increase in the hopes of “leveling the playing field”. In terms of Trump’s tariffs, the goal is to make the U.S. self-sufficient, save dying industries, and protect U.S. intellectual property. A tariff makes products crossing the border more expensive, which, in theory, should provide an incentive to assemble and create products in the United States.  In return, this could lead to job creation and more reason for companies to do business within the United States.

 

Short-Term Effects

In the short term, tariffs threaten to hurt some American industries. China announced Monday that they will raise tariffs on $60 billion of American goods. American farming and chemical makers are bracing for hits to their revenue. Many farmers use Chinese products and machinery in order to grow crops, and these products will now have an additional cost. The short term fallout for investors has been more prominent with the Dow Jones industrial average dropping by 600 points on Monday. This is due to multinational corporations with significant exports, seeing less revenue and profits overall. In the long term, things are much more uncertain.

 

Long Term Effects

Talks between both countries are still ongoing and no clear trade agreement is on the table. The good news is there is a trade summit with China at the end of March, that could reshape the trade agreement between the United States and China. Long term damage could be imminent with the current trajectory of the trade war. Manufacturers and farmers will take a hit however, ultimately individual Americans will pay for the higher tariffs. The new policies also threaten the flow of Chinese investment in the United States. The United States has also done damage to America’s reputation as a reliable trade partner. On the positive side, the trade war could lead to China accepting a fair trade deal. Tariffs are seen as a way to bring back these jobs. According to the National Association of Manufacturing, tariffs on China could help protect intellectual property, but also raise the cost of manufacturing. China has largely operated without any opposition to intellectual property theft and currency manipulation, tariffs are seen as a way to encourage China to follow trade agreements previously established, and also convince them to come to a new trade agreement.

 

Tariffs and the Automotive and Diesel Industry

Now that we know how tariffs can impact manufacturing, let’s look at how the diesel and automotive industry will be impacted in particular. Cummins, the diesel and natural gas engine maker, says it expects $250 million in tariff-related costs in 2019. The engine maker predicts $150 million will be from direct tariffs and $100 million to be from increased metal prices. Bill Hanvey, the president and CEO of the Auto Care Association, urged President Trump to not follow through on increased tariffs.  According to the Auto Care Association, the proposed increase from 10% to 25% on Chinese goods would negatively impact manufacturers and the motoring public as a whole. They predict the motoring public would see higher prices on a wide range of products. China was the second largest producer of auto parts imported into the U.S., and totals over $20.1 billion worth of product.

 

China and the United States Response Going Forward

Starting June 1st, China is retaliating by raising tariffs on $60 billion dollars worth of goods. This is in direct response to the U.S decision to hike tariffs on Chinese goods. China has decided to increase these tariffs on more than 5,000 products, some increases will go as high as 25% while other goods are increasing to 20%. Previously, these rates were set between 10% and 5%. This will further increase the conflict between the two economies and could potentially damage the global economy as well. If China decides to not back down on tariffs and not come to an agreement, we could see the entire global economy suffer. Prices of imported and exported goods will continue to rise and as a result, the entire global economy could take a hit. China could decide to raise tariffs even more than they already have some think it could even trigger another global recession like in 2008. The Chinese economy is already shaky and a serious shock could send it into free fall. On the flip side, China could decide to put their differences aside and decide to negotiate with the United States. This would hurt them economically in the short term because they would have to follow regulations which they have been ignoring for years. This could cause China to have to abide by Intellectual Property Laws, which has given the Chinese an advantage for years. Leveling the playing field means somebody loses, and in this case, China would be the biggest loser.

If the United States continues to play hardball with China, the economic impacts won’t be as severe as it would be for China. American workers, particularly in the agricultural and manufacturing industry, will pay higher prices for goods as this trade war continues. These prices could, in theory, go higher if the trade war becomes more extreme, with either side refusing to give any room to the other. However, if the United States decides to back down now, it could be even worse for our economy. This retreat of economic activity would be seen as a weakness, and the Chinese would take full advantage by manipulating the economy more than it already is. The best scenario for both countries is to come to an agreement fast so the economy can be allowed to flourish on its own.

 

Overall, the impact of tariffs on the economy is not black and white as some may think. It is a complicated issue with many variables that are changing daily. The long term effects could be much worse than the short term if both countries cannot come to an agreement. As it stands now, both countries are suffering due to this trade war. The United States needs to stay strong, in order to ensure that our trade in China is fair and complies with international laws.