Here’s How Tariffs Impacted Manufacturing in 2019
Date: Tuesday, December 31, 2019
Source: Sourcing Journal
Though President Trump has maintained his tariffs are designed to boost domestic manufacturing, new research shows the actual impact on the industry. And whether the good outweighs the bad depends on perspective.
“While existing research has mostly documented negative consequences of the tariff increases on the broad economy—including higher prices, lower consumption, reduced business investment, and drops in the valuations of affected firms—some might view these effects as an acceptable cost for achieving the policy aim of ensuring more robust manufacturing activity in the United States,” new research from the study, “Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector,” found.
It’s a perspective groups like the National Council of Textile Organizations (NCTO) may share; the council has been pushing for the levying of punitive tariffs to protect the domestic apparel and footwear industry, often as the rest of the sector largely battles against it.
In response to news of the phase one trade deal between the U.S. and China earlier in December, NCTO president and CEO Kim Glas said, “NCTO has strongly supported applying tariffs on finished products as key negotiating leverage since textile and apparel production is a key pillar of the Chinese manufacturing economy. Finished apparel, home furnishings and other made-up textile goods equate to 93.5 percent of U.S. imports from China in our sector, while fiber, yarn and fabric imports from China only represents 6.5 percent, according to government data.”
The phase one trade deal reduced tariffs on finished products while maintaining duties on necessary inputs the U.S. doesn’t make. Really, according to NCTO, the approach should have been the opposite—keeping duties on finished goods and cutting back on raw material tariffs. Done this way, it would reduce input costs for U.S. manufacturers.
“As domestic companies fight to compete with China and their illegal trade practices, it is important that U.S. manufacturers should be the first to see penalty duties removed on inputs not made in the United States,” Glas said.
While in some ways the tariffs protect U.S. manufacturers from foreign competition, the added costs owed to the new duties have proved a setback.
“We find that tariff increased enacted in 2018 are associated with relative reductions in manufacturing employment and relative increases in producer prices,” said Federal Reserve Board members Aaron Flaaen and Justin Pierce, who authored the study. “In terms of manufacturing employment, rising input costs and retaliatory tariffs each contribute to the negative relationship, and the contribution from these channels more than offsets a small positive effect from import protection.”
In short, the good is far from outweighing the bad when it comes to Trump’s tariffs.
What’s more, the report says factory gate prices have gone up 4.1 percent as a result of higher input prices. Not surprisingly, U.S. manufacturing has slowed down.
“Manufacturing employment and output increased at a robust pace in 2017 and, indeed, through much of 2018. Since the end of 2018, however, manufacturing output has declined noticeably and manufacturing employment growth has stalled,” the researchers said.
Over the longer term, U.S. manufacturing activity could ramp up some as companies “fully adjust their supply chains to avoid U.S. import tariffs,” according to the report, though a wholesale Made in America resurgence is still unlikely as East Asian manufacturers are picking up what China is putting down, and an influx of both workers and skills to the U.S. isn’t expected.
The tariffs aren’t working according to Trump’s plan.
“The traditional use of trade policy as a tool for the protection and promotion of domestic manufacturing is complicated by the presence of globally interconnected supply chains,” Flaaen and Pierce said. “The impact from the traditional import protection channel [which is supposed to protect domestic industries from foreign competitors] is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.”
What happens in 2020 could bring an added adverse impact to the sector, though the hope is that the novelty of levying tariffs at a tweet’s notice wears off in the new year.