July 2018
June 29, 2018
September 2018
September 4, 2018
A Tale of Two Experiences: New Tariffs Have Widely Differing Impact on Americans
Searing heat and wildfires in the west, tropical downpours and flooding in the east. Folks in the U.S. had vastly different experiences with weather last month. The same goes for trade. In this issue we highlight the widely disparate experiences different parts of the economy and Foreign-Trade Zone world are seeing in the wake of the disputes with many of America’s trading partners. Share your experience. Leave a comment below on the impacts you have seen from the recent U.S. trade measures.
Top Story: U.S. Economy Continues To Defy Gravity (And The Trade War)
The Commerce Department reported last week that U.S. gross domestic product (GDP), the broadest measure of goods and services produced in the economy, grew at a 4.1 percent rate in the second quarter of the year. Consumers led the way, shrugging off higher gasoline prices and sluggish wage growth to step up their spending on everything from cars to clothes to restaurant meals.
That figure just exceeds the 4% target set by President Trump during his campaign. He hailed the data as evidence that his policies on trade, taxes and other issues were working. Robust growth is also good news for Republicans, who are counting on the economy to help them in midterm elections this fall.
“Once again, we are the economic envy of the entire world,” the President declared outside the South Portico of the White House, flanked by his top economic advisers.
Economists caution that the latest acceleration, while good news for American businesses and households in the short term, is unsustainable in the long term if investment in capital does not start to accelerate as well. Investment growth that lags GDP growth raises the risk that the recovery will flame out in the years ahead.
The quarter’s figures were pumped up by a range of one-time factors that are unlikely to recur. Most forecasters expect growth to cool in the second half of the year — even without factoring in the possibility of a trade war, which corporate executives in recent weeks have cited as a source of uncertainty that could force them to pare hiring and investment plans.
But there is little question that this spring was a high point in the rebound from the recession that struck a decade ago.
The unemployment rate, which topped out at 10 percent, has fallen to 4 percent. Job growth is on a record streak. American factories, an emphasis for the President, are hiring at their fastest rate in two decades. The GDP performance was the best quarterly showing since 2014.
Measures of underlying growth were robust, and economists say it is increasingly likely that full-year growth in gross domestic product could hit 3 percent in 2018 for the first time in the nearly decade-long recovery.
“The bottom line is that the economy is doing better,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.
At Grote Company, a manufacturer of food-processing equipment in Columbus, Ohio, business is “record fantastic,” according to Bob Grote, the company’s chief executive.
“Everybody I talk to is literally having banner years the past few years,” he said. “I don’t see any end in sight right now.”
Mr. Grote said he was benefiting from several trends. Confident consumers are eating out more, leading to more demand for the pepperoni slicers, bread cutters and sandwich-assembly equipment that Grote makes. The tight labor market is making it harder for food businesses to hire workers, creating more demand for automated equipment. And the tax cuts passed last year have encouraged customers to invest in equipment — and have led Grote to do the same, moving projects planned for 2019 or 2020 up to the present day.
“We’ve spent more on capital equipment this year than we probably have in the last five combined,” Mr. Grote said. “We’re going to see the benefits of it a lot sooner.”
That’s exactly the kind of investment that the tax law was meant to encourage. So far, however, there is scant evidence that companies broadly are reinvesting their tax savings. Business investment in equipment has grown more slowly in the first half of the year, and many companies are choosing to pay dividends and buy back shares instead.
“Business spending is not picking up the way proponents of the tax cut had hoped,” said Michael Gapen, chief United States economist for Barclays.
Instead, the tax cuts seem to be encouraging consumer spending, which rose 4 percent in the spring quarter, the biggest increase since 2014. Increased federal spending — the result of the two-year budget deal passed by Congress this year — is likewise giving the economy a lift, helping to nudge G.D.P. growth out of the rut of 2 to 2.5 percent where it has spent much of the recovery.
Also encouraging is that inflation slowed slightly in the second quarter, so the GDP report is unlikely to persuade Fed officials to deviate from their gradual and carefully devised march to higher interest rates.
Soybean exports were up more than 50 percent in May from a year earlier as trade tensions led foreign buyers to stock up on American products. Over all, exports rose at a 9.3 percent rate in the second quarter, accounting for a quarter of the total G.D.P. growth.
With China Feeling The Pinch, President Suggests Yet Another Round Of Tariffs
President Trump said he is ready to intensify the trade war with China by slapping tariffs on all $500B of Chinese imports. "I'm ready to go to 500," he said in an interview with the CNBC news channel.
The President made his comments before the most recent round of US tariffs has had time to take effect. Only last week, the Administration listed $200B worth of additional Chinese products it intends to place tariffs on as soon as September.
The list named more than 6,000 items including food products, minerals and consumer goods such as handbags, to be subject to a 10% tariff.
The US and China have already imposed tit-for-tat tariffs of $34B on each other's goods. The President's threat to raise that to $500B represents a major escalation.
"We're down a tremendous amount," the President told CNBC, reiterating his view that China's trade surplus with the US amounts to unfair trading practices. When asked if the move might cause a stock market sell-off, he responded: "Well, if it does, it does. Look, I'm not doing this for politics. I'm doing this to do this right thing for our country."
The US also wants China to stop practices that allegedly encourage transfer of intellectual property - design and product ideas - to Chinese companies, such as requirements that foreign firms share ownership with local partners to access the Chinese market.
"It's proof, if it were needed, that the president is prepared to go all the way in the trade war to exact concessions from China, which simply cannot match the US firepower," said Neil Wilson, chief market analyst for Markets.com.
"In light of the EU and others saying they are ready to respond to tariffs on cars, the stakes are rising fast. Whether we get to the point where there is a full-blown trade war remains debatable, but the odds are shortening by the day."
China has said it will have to take what it called necessary counter-measures after the U.S announced plans for more tariffs on imports. The Asian giant says it's shocked and that the proposals will harm the world.
One problem for Beijing is that it imports far less from the U.S. than it exports - and that gives it less scope to retaliate - they may run out of American goods to penalize. Last year, for example, China imported almost four times fewer goods to the U.S. than what it exported.
But running out of goods doesn't mean running out of options. China has massive financial leverage in that it is America's biggest foreign creditor. The total U.S. debt is over $18 trillion. A third of it is in hands of foreign investors with China's part amounting to $1 trillion.
Should China choose to sell a large amount of that debt, it could drive up the cost of borrowing in the U.S., and cause havoc on world markets.
Unexpected Tariff Victim: American Aluminum Icon
Alcoa, the 130-year-old American aluminum producer, said last week the aluminum tariffs imposed at the beginning of June were adding to its costs. That, in part, prompted the company to lower an earnings forecast. Alcoa’s shares slid 13 percent on the announcement.
The company’s second-quarter results, as well as comments by Alcoa executives on a conference call, revealed new information about how the steel and aluminum tariffs were hurting the very companies they were intended to protect.
About half of Alcoa’s sales are booked in the United States, but a smaller share of its assets are in the country. The Trump administration’s tariffs hit Alcoa when it sells aluminum produced in its overseas plants, predominantly those in Canada, to customers in the United States.
On a call on to discuss second-quarter earnings, Alcoa's chief financial officer, William F. Oplinger, said the aluminum tariffs, which the Trump administration set at 10 percent, would increase Alcoa’s costs as much as $14 million a month. Alcoa’s total hit this year could total around $100 million.
That’s about 12 percent of the $822 million in pretax profits that Alcoa made in the first half of the year It’s sizable, but not a crippling blow.
The tariffs have also helped Alcoa and other producers by pushing the overall price of aluminum up in the United States. But it’s not clear whether the increase will be sustained. Buyers rushing to purchase aluminum before the tariffs were imposed may have helped drive prices higher.
Proponents of the tariffs on metals hope they will lead to more production by steel and aluminum producers in the United States. No longer having to compete so fiercely with subsidized foreign producers, American producers may be able to invest more and expand. One way that may happen is if producers fire up dormant operations. But Alcoa’s chief executive, Roy C. Harvey, said that, if all inoperative facilities at American producers were revived, the United States would still need to import the “vast majority” of its aluminum needs.
Tariffs Are Taking A Mounting Toll On Factories And Farms
Two decades after BMW built a car factory in Spartanburg, South Carolina, the automaker has become the most important local job creator, earning the affection of a deep-red county where one in 10 people earns a living making vehicles or their parts. It is also one of the largest Foreign-Trade Zones in the United States.
The Spartanburg plant is BMW’s biggest in the world. It has helped draw more than 200 companies from two dozen countries to Spartanburg County. And the German company — not an American icon like Ford or General Motors — is now the largest exporter of cars made in the United States, turning the port of Charleston, S.C., into a hub for global trade.
But by setting off a global trade battle, President Trump is threatening the town’s livelihood. People aren’t happy.
Lawmakers held a hearing in Washington on whether imported auto parts pose a national security threat, with the possibility that the administration will levy hefty duties. If imposed, the tariffs would most likely have deeper and wider-reaching repercussions for the economy than levies on fish or steel. Cars don’t come together in one plant, with one work force — they’re the final result of hundreds of companies working together, in a supply chain that can snake through small American towns and cross oceans.
The July hearing drew dozens of witnesses, including auto-industry representatives and small-business owners, to argue against the tariff plan. They said the move would make it more expensive to build cars here and would prompt other countries to respond in kind, hurting exports.
China has already increased its levies on cars from the United States. The European Union has promised nearly $300 billion in retaliatory tariffs. President Trump puts much of the blame on Europe. The European Union imposes a 10 percent tariff on American-made cars, compared with the 2.5 percent United States levy on European cars. The president recently called the European Union a “foe” and has developed a particularly frosty relationship with Germany, which he has deemed “very bad” on trade. Some workers in South Carolina want the President to lay off of their German patrons, but others are happy he’s taking them to task for the imbalance.
“Open up the barriers and get rid of your tariffs,” he said of the European policies at a March rally in Pennsylvania. “And if you don’t do that, we’re going to tax Mercedes-Benz, we’re going to tax BMW.”
But lashing out at German carmakers could inflict wounds in this upstate swath of South Carolina. In March, BMW’s chief executive, Harald Krüger, said the auto tariffs “would have an impact on jobs in the United States.” In a June letter to the Commerce Department, the company said it might cut investment and production in Spartanburg if selling its American-made sport-utility vehicles abroad became too expensive.
Already this year, BMW stopped exporting the X3 crossover from Spartanburg to China and began making more of the S.U.V.s in plants in Shenyang, China, and Rosslyn, South Africa.
It announced last week that it would increase production capacity to 520,000 vehicles in its two Shenyang plants next year, overtaking the total production in Spartanburg. This week, the Chinese government announced that it would allow BMW to increase its stake in the Shenyang joint venture to 75 percent from 50 percent, making it the first foreign carmaker to own a majority of a manufacturing operation in the country.
Those overseas moves are being watched warily here. “This directly affects us,” said A. J. Cemprola, a software developer at BMW’s Spartanburg plant. “It isn’t talk anymore.”
Mr. Cemprola, 30, said the job helped him pay off his student loans and buy a four-bedroom home with his wife. Everyone in town, he said, works at BMW or knows someone who does.
“This area has grown a lot from BMW, and it’s been great for South Carolina,” he said. “And we don’t want that to change.”
The company insists it’s going to produce a new vehicle, the X7, in Spartanburg. But the tariff moves have sent a shiver through the area. If the company decides to make fewer S.U.V.s here, the effects would spread far beyond Mr. Cemprola’s paycheck.
A significant chunk of the thousands of parts in an X3 aren’t made in Munich — they're manufactured by small and midsize companies across the United States. The door system, for example, comes together at a plant in Duncan, S.C., owned by Brose, a German parts maker that also has factories in Michigan, Illinois and Alabama.
A line of five South Carolinians works with three robots to fit all the pieces of the door system together. The plastic plate came from Baxter, a producer in Westminster, S.C. A supplier in Ohio made the fleece inside. Brose also makes the pair of oblong air gates that give the front of some BMWs their toothy look. It imports the air-gate motor from its plant in the Czech Republic.
Brose didn’t want to speculate on the impact of the tariffs. But the Brose plant manager, Michael Morgenroth, said, “If you’re smart, you can draw your own conclusion.”
Other suppliers that have set up shop in South Carolina have been more direct. ZF Friedrichshafen of Germany, a major producer of transmissions, and Magna of Canada, a giant in seat manufacturing, said in letters to the Commerce Department that the tariffs would directly hit their American workers.
“It’s not good what is happening at the moment,” said Erwin Doll, the chief executive of Röchling Automotive, a German company that employs 400 people at a plant in Duncan. Röchling makes underbodies of S.U.V.s for BMW, along with plastic systems that make the vehicles more aerodynamic. “If BMW or Daimler or Nissan or Honda cannot export as many as they like, then obviously it will hurt our turnover as well,” Mr. Doll said of the plant’s prospective revenue.
The company has plants in many of the places that BMW does around the world, and if the carmaker shifts more production out of Spartanburg, Mr. Doll would probably need to follow suit. “We would have to adjust our cost and think about how we invest,” he said.
At the Port of Charleston on Friday, as BMWs cycled out of the docks, trade barriers seemed a distant worry. Workers drove more than 300 gleaming S.U.V.s onto a massive ship that functions like a parking garage on water, with scheduled stops in England, Belgium and Germany.
In June, the port handled more shipping containers than in any other month in its history — possibly reflecting a surge in shipments timed to avoid new tariffs — and the fiscal year that just ended broke traffic records. But Jim Newsome, chief executive of the South Carolina Ports Authority, warned that if the back-and-forth with Europe on trade escalated, “that would hurt our port.”
Workers appear less concerned, for now. “I don’t see where we have been affected by the trade war like they’ve been talking about,” said Glenn Jamison, 62, a longshoreman who spends his days checking a video feed of arriving containers to make sure they’re sealed and not damaged.
He looks at the count of boxes filled coming into the port and leaving every day, and the numbers keep going up. Ten percent of all of the containers that the port processes are filled with products related to the auto industry.
“We don’t see any instability,” he said. “We’re hearing about it, but we don’t see it yet.”
The impact to agriculture from the retaliatory tariffs has been more immediate, and so the Trump administration just announced that it would provide up to $12 billion in emergency relief for farmers, moving to blunt the financial damage to American agriculture (and the political fallout for Republicans) as the consequences of the tariffs roll through the economy.
The relief money, announced by the Department of Agriculture, seemed to be an indication that the President is ready to extend the tariff wars. “The actions today are a firm statement that other nations cannot bully our agricultural producers to force the United States to cave in,” Sonny Perdue, the secretary of agriculture, said during a call with reporters to unveil the program.
The move drew swift condemnation from many farm groups and lawmakers who worry about a cascade of unintended consequences that may be just beginning. One farm-group study estimates that corn, wheat and soybean farmers in the United States have already lost more — $13 billion — than the administration is proposing to provide as a result of the trade war. The prospect of retaliation has upended global markets for soybeans, meat and other American farm exports, and farmers are warning that tariffs are costing them valuable foreign contracts that took years to win.
“You have a terrible policy that sends farmers to the poorhouse, and then you put them on welfare, and we borrow the money from other countries,” Senator Bob Corker, Republican of Tennessee, told reporters on Capitol Hill. “It’s hard to believe there isn’t an outright revolt right now in Congress.” Senator Lisa Murkowski, Republican of Alaska, asked how the president could single out farmers for help when the manufacturing and energy industries also stand to lose in the trade war.
“Where do you draw the line?” Ms. Murkowski asked reporters.
The President could be forced to prop up other domestic industries as retaliatory taxes imposed by trading partners begin to sting automobile manufacturers, distillers and other impacted sectors. Republicans who cherish their party’s reputation as the bastion of free markets and fiscal responsibility wondered aloud about the president picking winners and losers in a trade war he is bent on waging.
“The U.S. Department of Agriculture is trying to put a band-aid on a self-inflicted wound,” Senator Patrick J. Toomey, Republican of Pennsylvania, wrote on Twitter. “This bailout compounds bad policy with more bad policy.”
Farmers have borne the brunt of the decision to impose tariffs, which is already costing American producers billions of dollars and threatens to inflict political pain on Republicans in farm states in the midterm elections in November.
The European Union, Canada, Mexico, China and other countries responded to the tariffs on steel, aluminum and Chinese products by imposing taxes of their own. They have often targeted farm country, the source of some of America’s biggest exports and an important political base for the President. American soybeans, pork, sugar, orange juice, cherries and other products now face tariffs in foreign markets that make their products less desirable.
At a speech in Kansas City, the President said Americans should “just be a little patient” with the pain they may be feeling from the trade war, arguing that his actions were forcing other countries to the negotiating table to cut deals that would be better for them in the long run.
“They don’t want to have those tariffs put on them — they’re all coming to see us — and the farmers will be the biggest beneficiary,” he said at a Veterans of Foreign Wars convention. “We’re opening up markets. You watch what’s going to happen.”
Some farm groups praised the move, albeit as a short-term solution.
“We are grateful for the administration’s recognition that farmers and ranchers needed positive news now, and this will buy us some time,” said Zippy Duvall, the president of the American Farm Bureau Federation. “This announcement is substantial, but we cannot overstate the dire consequences that farmers and ranchers are facing.”
“The president’s announcement of billions of dollars in aid that will be made available to struggling farmers later this year is encouraging for the short term,” Senator Charles E. Grassley, Republican of Iowa, said in a statement. “What farmers in Iowa and throughout rural America need in the long term are markets and opportunity, not government handouts.”
Senator Ron Johnson, Republican of Wisconsin, said farmers in his state “want trade, not aid.”
“I support President Trump’s call for reciprocal trade and his effort to stop China’s theft of American intellectual property, but we should stop self-inflicting permanent damage to America’s economy through tariffs and a trade war,” Mr. Johnson said.
U.S. Foreign-Trade Zones Board Activity
A Tale of Two Experiences: New Tariffs Have Widely Differing Impact on Americans
Searing heat and wildfires in the west, tropical downpours and flooding in the east. Folks in the U.S. had vastly different experiences with weather last month. The same goes for trade. In this issue we highlight the widely disparate experiences different parts of the economy and Foreign-Trade Zone world are seeing in the wake of the disputes with many of America’s trading partners. Share your experience. Leave a comment on the impacts you have seen from the recent U.S. trade measures.