If tariffs are not the answer to the China problem, what is?: Page 2 of 2

August 05, 2019

However, in a bit of a dichotomy, the “sentiment” of the companies surveyed “rose slightly higher into the numerical territory signaling manufacturing expansion. As did the ‘new orders’ indicator, though it was slightly weaker in absolute terms." (That is, it wasn’t signaling expansion as strongly as the output indicator.)

Tonelson found something “really weird” when it came to questions about the impact of President Trump’s tariffs. “The responses from 115 companies made clear they believed that the levies’ effects were more damaging than last September, when they previously answered those questions (and when Texas and national manufacturing was going great guns). . . . By many key measures, strong majorities reported that the tariffs had ‘no impact’ on their fortunes. The companies expected the tariff damage to fade considerably within two years. And many were responding to tariff pressures they faced by replacing foreign suppliers with domestic suppliers. In other words, they were replacing imports with domestic orders and production.”

The biggest impact tariffs were having on these manufacturers in the Dallas Fed report was on capital spending—from 69.4% to 64.9%, “when 20% of the manufacturers responding reported that the tariffs were leading them to cut such investments.” Job growth slowed in that district from 82.1% to 78.3%, which is still a really good number in spite of things.

Tonelson noted that the share of companies reporting benefits from the tariffs declined from last September’s report, “but much more modestly.” In the June report, they still averaged close to 10%. Tonelson’s conclusion is that Trump’s tariffs have not instigated a “tariffmageddon.”

M. Holland’s Morgan didn’t sound quite as hopeful when I spoke with him today. “Any escalation and prolonging of this tariff fight is not healthy for the industry,” Morgan said. “We’ve seen a number of major producers reporting disappointing results in earnings for the rest of the year citing a slowing global economy and uncertainty. Some companies made significant bets on the U.S. economy and low-cost feedstock—hundreds of millions of dollars—and this puts those at risk. The industry generally has been critical of the tariffs.”

Morgan sees all of this as “a terrible distraction” that in the long run erodes business and changes market dynamics, creating imbalances. “We’ve been pretty deft at managing all of this, but it’s a distraction we don’t need,” said Morgan. “All the tentacles of this trade war reach into many industries and ultimately to consumers, where the buying power has barely budged. Now we’re suffering inflation and debt levels. There’s a misconception that somehow China is paying these tariffs—we’re all paying these tariffs. It’s not an efficient way to tax.”

Perhaps it’s too little too late for the United States to do anything about the China situation, because other administrations have failed to address all of these concerns, including monetary manipulation. If tariffs are not the answer, what is?

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