Let’s talk trade.
Without foreign imports, we wouldn’t have Italian wine, French cheese or German beer on our store shelves. Americans also wouldn’t be able to easily buy Bic pens, Birkenstock sandals and Nikon cameras.
Free trade creates ready access to items made all over the world. And it gives U.S. companies a much larger marketplace for their own products and services.
But some people, including President Donald Trump, believe free trade hurts U.S. companies when foreign competitors receive government support and can afford to sell products in the U.S. at artificially low prices. Putting tariffs on certain foreign-made products makes American-made goods cheaper by comparison.
Trump’s tariffs on $34 billion in Chinese imports went into effect just after midnight Friday morning. Chinese officials retaliated with duties on U.S. products of equal value. The president has threatened to increase tariffs on up to $550 billion in Chinese goods.
No one knows how the trade war will play out, but we’ve gathered insight from some experts willing to take on the issue.
Q. What is international trade?
A. Although the topic has been trending in recent days, Michael Hicks isn’t sure most people know what international trade really is – and isn’t.
The director of Ball State University’s Center for Business and Economic Research explains that people living in one country are simply buying products from people living and working in another country.
The six-pack of Moosehead you bought last year counted toward the 2017 total U.S. trade with Canada, for example.
Some people are troubled by trade imbalances between the U.S. and other countries. But trade between any two countries doesn’t have to balance, Hicks said.
As an example, most working people sell their time and energy to an employer in exchange for a paycheck. Those employees don’t turn around and spend 100 percent of their paychecks on products their employers make.
That means there’s a trade imbalance between you and your employer. But that doesn’t mean your employer has no money coming in.
You divide your paycheck between mortgage payments, utilities, groceries and other wants and needs. Then maybe your banker, your meter reader or the bagger at your local grocery spends part of his paycheck on your employer’s product.
Or maybe the money flows through a few more fingers before it gets back to your company. Regardless, if your employer isn’t making money, you won’t have a job for long.
For the record, the U.S. exported $144 billion of goods in May and imported $208 billion worth, according to the U.S. Census Bureau. Those are seasonally adjusted numbers.
Q. Who gets hurt in a trade war?
A. Slapping a tax on Chinese steel, Canadian lumber and Russian aluminum might sound like a good way to punish foreign countries that seem to exploit lax trade policies.
But it’s American consumers who will suddenly have to pay more for things from cars to washers to houses, Hicks said.
Not only do consumers stand to lose in a trade war, entire industries could suffer, he said. In fact, Hicks couldn’t think of one group – except investors who own steel manufacturer stocks – that will likely benefit from Trump’s tariffs.
“I think,” he said, “this sweeps away the positive effects of the tax cuts several times over.”
Danielle Hale, chief economist for Realtor.com, agreed.
The philosophy behind imposing tariffs is to help domestic industries, Hale said. But she’s not sure that’s effective.
“It’s very difficult to estimate what effects the tariffs will have,” she added.
Q. How is all this affecting farmers?
A. Don Wyss, an Allen County farmer, said it has been a good start to the local growing season. Wyss Farms Enterprises farms 1,500 acres, about half corn and the other half soybeans, south of Fort Wayne International Airport.
“Everything’s planted. Everything’s growing,” he said, adding that rain is good for the crops.
How much Wyss and his fellow farmers will be able to sell soybeans for is up in the air, however.
China’s 25 percent tariffs on U.S. soybeans, which went into effect Friday, could send prices plummeting if Chinese consumers won’t pay it and the country’s importers instead turn to South America and other sources for the crop, which is fed to livestock, including chickens and hogs.
Wyss, a board member of the Indiana Soybean Alliance, said it’s hard to predict the final results of the trade war.
China is the largest market for U.S. soybeans, he said. As China’s economy has grown over the past 20 years, diets there have improved. Many Chinese have become accustomed to eating animal protein more often.
“China cannot say no to that,” Wyss said of the dietary evolution. “They have to continue buying soybeans.”
The local farmer doesn’t believe South American producers can fill the demand. That would force Chinese importers to pay higher prices on U.S. soybeans. Whether they are able to pass that full tariff along to customers is yet to be seen.
In any case, it’s likely that Chinese consumers will soon be paying more for soybeans, pork, poultry and eggs.
“Markets have a way of working out,” Wyss said.
“At the same time, we want to have a fair trading platform with countries around the world,” he said.
Q. How are local homebuilders and homebuyers being affected by tariffs on Canadian lumber?
A. Experts have estimated the typical new home will cost $9,000 more due to a new U.S. tariff on Canadian lumber, Hale said.
The median price for a new home in the U.S. was $313,000 in May. In Allen County, the median was $230,000 in May, according to the Home Builders Association of Fort Wayne.
Canadian lumber is widely used in U.S. home construction. The increase could price some people out of the new home market, Hale said.
For others, spending more for a house will cut into how much they can spend on other items and services that usually accompany a move into a new home, including professional moving services and new furniture and window treatments.
“The American consumer is a big part of the overall economy – 60 to 70 percent,” she said. “When their money doesn’t go as far, that has ramifications across the whole economy.”
A factor that economists refer to as elasticity will play a big role in who suffers more – consumers or producers, Hale said.
For example, when gasoline prices spike, drivers still need to buy enough gas to get themselves to work and back. But, she said, those same consumers might stay much closer to home on weekends and during vacation.
Soybean farmers have much less elasticity, or control over their circumstances. They’ve already planted their crops this season, she said. Even if prices plummet, farmers are unable to adjust how much they’ve invested in seed, fertilizer and other expenses this year.
For those Chinese hog producers, if they feed their hogs soybeans, they have to buy them from somewhere. If other countries can’t produce enough to meet the need, Chinese farmers will have to pay the higher, tariff-fueled prices for U.S. crops.
It’s a gamble, Hale said. What’s more, she added, it’s hard to predict how much the trade war will escalate with retaliatory tariffs piled on by each side.
So far, Jack Daniel’s Tennessee Whiskey and Harley-Davidson motorcycles are among the popular American-made products being targeted for tariffs by the European Union in the tit-for-tat spat.
The tariffs on Canadian lumber are significant, however, even if the situation doesn’t continue to spiral. The housing market plays an important role in the U.S. economy.
In May, the seasonally adjusted rate of new single-family homes sales was 689,000, almost 7 percent more than in April, according to the Census Bureau.
In Indiana, the number of new single-family homes built last year was 16,075.
Although it represented growth, the author of an Indiana University study said the number was only about half as many permits issued annually between 1998 and 2005, before the housing sector meltdown.
Matt Kinghorn, the Indiana Business Research Center’s senior demographer, said there aren’t enough homes for sale to meet demand.
“Another leap forward in new home construction is sorely needed to help alleviate problems caused by the short supply of existing homes on the market,” he said in a statement.
Higher construction costs could put a crimp into building, Hale said, which could discourage millennials from becoming homebuyers.
Q. But won’t some employers benefit from these tariffs? What about Steel Dynamics? The Fort Wayne-based steelmaker wanted steel tariffs, right?
A. Right. In July 2017, Mark Millett, Steel Dynamics’ president and CEO, told cable news channel CNBC that he “absolutely” wanted tariffs targeting imported steel to be implemented. China was his primary focus.
Even so, he said countries worldwide have been dumping steel in the U.S. market, driving prices down. At that time, Steel Dynamics was using only 60 percent of its total capacity for producing structural steel because that rate met its customers’ orders.
Messages left at Millett’s office requesting comment for this story weren’t returned.
It’s safe to assume that business is good these days, however. In late June, Steel Dynamics announced plans to invest $140 million to add a third galvanizing line at its Columbus, Mississippi, operation.
Officials said in the news release that Steel Dynamics is the largest U.S. source of galvanized flat roll steel not destined for the automotive market.
And last week, the company completed the $400 million cash purchase of Heartland Steel Processing in Terre Haute.
American Metal Market, a trade publication, in June presented Steel Dynamics with its 2018 Steel Producer of the Year award, based on excellence in the industry.
Beyond the $140 million investment planned for the Mississippi plant, Steel Dynamics has committed between $90 million and $100 million in additional upgrades there to drive profits through increased efficiency and product diversification.
The upgrades will allow the plant to meet standards to sell to the automotive market, Millett said last month in a statement.
Q. What are the effects of the first month of U.S. tariffs on imported steel?
A. No federal data are available yet on the effects of the Trump administration’s steel tariffs, which went into effect June 1. But in late June, a Census Bureau preliminary report on steel imports showed that China isn’t the only country to watch.
Japan, Ukraine and the Netherlands all increased exports to the U.S. in May, the report stated. Looking at data through the first four months of this year, Canada and Korea increased steel exports to the U.S.
Countries that decreased steel exports to the U.S. included Russia and Turkey.
U.S. steel imports totaled $2.7 billion in May and $3.1 billion in April, according to the Census Bureau.
Trade doesn’t move just one way, however. U.S. steel companies also export. Last year, they sold about $5 billion in steel to Canadian customers, about 55 percent of Canada’s total $9 billion in steel imports.
Canadian officials are retaliating to U.S. tariffs with their own tariffs on U.S.-made steel. Canada’s tariffs are scheduled to go into effect today.
Consider, too, that some U.S. companies need steel in shapes and sizes that aren’t made in the United States. Leaders of those companies have been quoted saying they’ve applied for federal waivers that would allow them to avoid paying the tariffs.
If their requests are denied, some have said they might have to cut expenses by eliminating some jobs, the Associated Press reported.
One measure of the tariffs’ affects can be seen in the U.S. markets, however, which have experienced increased volatility in the last couple of weeks, including a 500-point drop in the Dow Jones industrial average in one day.
Hefty Wealth Partners, a financial advisory firm in Auburn, warned clients in a late June newsletter to expect “undue market volatility” in the near-term and a potential for lower corporate earnings in the mid-term.
Daimler AG, parent company of Mercedes-Benz, is among the companies that have revised their earnings outlooks downward as a result of the tariffs.
Trump has said he’s considering a 25 percent tariff on imported vehicles and auto parts. Even companies with U.S. plants would be affected.
The Alliance of Automobile Manufacturers in late June estimated that auto tariffs would translate into U.S. consumers paying $45 billion more for cars – $5,800 per vehicle.
General Motors, Toyota and Volkswagen are among the automakers represented by the industry group.
General Motors’Allen County local assembly plant employs about 4,000 hourly and salaried workers who build about 1,475 Chevrolet Silverado and GMC Sierra pickups each day in three shifts.
The Detroit automaker also operates a powertrain plant in Defiance, Ohio, with a workforce of more than 800.
Q. What’s so great about free trade?
A. As a retired U.S. Army officer, Hicks knows that some international affairs decisions hinge on closely guarded secrets. That makes him slow to criticize federal officials who implement unpopular policies.
“I tend to give the executive the benefit of the doubt that they have information that isn’t public knowledge,” he said during a phone interview last month.
But even Hicks admits he’s flummoxed by Trump’s decision to launch a trade war against U.S. allies, including Canada and France, and rivals, including China.
The disastrous results of previous trade wars are well-known, he said. The last U.S. trade war was in 1933, just long enough ago that most people have no memory of it.
But those economic realities aren’t secret, he said.
“Quite literally, the president has found the only economist that doesn’t support trade and named him the head of trade,” Hicks said.
Hale, the Realtor.com economist, agreed that most economists across the board support free trade.
She described free trade as “a huge benefit” to consumers worldwide. Although there are costs to some people, she said, overall economies benefit.
In those cases, Hale said, government can offer job training programs to help workers transition to other industries. For example, she said, coal miners can be trained to make wind turbines or solar panels.
The U.S.Constitution doesn’t allow states to restrict trade with each other because, Hicks said, “the Founding Fathers understood that free trade was very important to the economy.”
“Trade is the opposite of war,” Hicks said. “It involves mutual benefit and trusting.”
Q. Didn’t organized labor oppose the North America Free Trade Agreement? That group must be against free trade.
A. You’d think so, wouldn’t you? But it’s not true.
Tom Lewandowski, former president of the Northeast Indiana Central Labor Council, AFL-CIO, said labor leaders opposed the NAFTA when it was signed in 1993.
But, he said, their opposition wasn’t because labor is against free trade. Lewandowski said free trade is terrific – as long as workers are involved in discussions that establish the rules.
Union leaders predicted at the time that employers would move jobs to areas where they could pay workers low wages and neglect various safety rules. That, Lewandowski said, is exactly what happened.
Labor wants fair wages and safe working conditions throughout North America. Free trade should raise standards for workers in all participating countries, not lower them, Lewandowski said.
Other standards needed in trade agreements include product quality, environmental impacts and financing, he said.
Since leaving the Central Labor Council, Lewandowski has worked for the Workers Project, which represents the unemployed and anxiously employed. Many of those people rely on food banks and other forms of assistance to meet basic needs, he said.
Not only can’t they pay tariffs on China-made products, Lewandowski said, “a good chunk of folks can’t afford (to buy) anything now.”
This article provided by NewsEdge.