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Once again, Trump has sounded the dog whistle of protectionist trade measures against China, with an Executive Order to find products to tax. It’s very likely that the tariff tax will be on imported technology products starting sometime in the next 60 days. In addition, Trump has asked for restrictions on Direct Foreign Investment by Chinese firms in the U.S.  Once again, it is unclear if the administration has any depth of understanding regarding what this will mean for American industry and American consumers.

Our global supply chains are an interwoven tapestry of parts, worldwide manufacturing, and global markets that cannot be easily unwound on a whim or to please a political base. Over the past 25 years, Americans in particular, have benefitted from inexpensive consumer goods, industrial products, and parts coming from China. China has benefitted too, lifting 120 million people out of poverty into the Chinese middle class and making China the second largest economy in the world.

But now, inciting a trade war seems to be the Trump Administration’s preferred strategy. Unfortunately, Wall Street doesn’t like it, American manufacturers don’t like it, and China has announced it will strike back. We saw this coming as I wrote about in my March 5, 2018 SCMR blog.

China has announced a $3 billion list of U.S. goods for possible retaliation in a tariff dispute with Trump. China released a statement on March 23 that said it is “not afraid of and will not recoil from a trade war. China is capable of facing any challenge and that if a trade war were initiated by the U.S., it would fight to the end to defend its own legitimate interest with all necessary measures.”  On Monday, China said that it will impose a 25 percent tariff on products including U.S. pork and aluminum scrap and 15 percent tariffs on products including sparkling wine, steel pipe, cars and foods including soybeans, grapes, apples, and walnuts.

Trade wars are not straightforward. In fact, China is likely to bite back where it really hurts America – in agricultural products. It is American farmers who will be damaged in return for Trump’s imposed U.S. tariffs on high tech products. The U.S.  proposed tariff list covers 1,300 items, including high-definition video monitors, electromagnets used in MRI machines, aerospace products, and other machinery. We have awakened the Trade War beast.

According to data from Bloomberg, U.S. stocks are on track to have their worst April start since 1929, at the beginning of the Great Depression. Wall Street isn’t pleased. Trump’s signing of the memorandum on the tariff plan triggered a market sell-off and a very rocky March.

And what about all those silk shirts and ties, and dresses and shoes with a Donald Trump or Ivanka Trump label coming from sweat shops in China? They are likely to be excluded from the list of new tariffs.  Should they be included later, the price of these goods will of course, increase for U.S. consumers.

“It is just unbelievable. It will do no good to the United States,” said a vice president of a leading Chinese TV set manufacturer. “The United States lacks a complete industrial supply chain for TV sets,” he said. TVs are not currently manufactured in the U.S., with the exception of some assembly operations for products sold at Walmart. These sets are assembled from imported parts. The impact to U.S. consumers will be significant.

Yep, no good will come of it. At the Reshoring Institute, we support the rebuilding of manufacturing in America through innovation, automation and localization. Trade wars are not a good way forward.

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Is This Another Smoot-Hawley?

There are economists who say that NAFTA has caused the loss of countless jobs to the lower-cost environments in Mexico, and that these jobs will come back in a post-NAFTA trade environment. They argue that instead of doing nothing, the US should take every opportunity to raise all import tariffs, eliminate trade agreements, and close the borders to immigrants and trade. This, some say, will make America competitive, even though there is no gain in productivity or cost reduction in American manufacturing.

What they may be forgetting is that the US has gone down this pathway before with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on about nine hundred products Historians blame Smoot-Hawley for triggering the Great Depression of the 1930s. They point out that Smoot-Hawley caused sharp increases in consumer prices, which led to consumers buying fewer products, which in turn led to low demand, lay-offs, high unemployment, and ultimately, the stock market crash.

For sure, NAFTA has its problems. The import/export paperwork required to track goods moving across the borders and the associated record-keeping can be onerous. Special rules for truckers from Mexico have taken a toll on American truckers, and the effects don’t end there. But overall, most economists think NAFTA has had a net positive effect on the US economy.

Trade Wars

Another concern is the likelihood of a trade war with Mexico and other countries. If tariffs are raised on imports to the United States, or if the proposed Border Adjustment Tax is imposed, our trading-partner countries are likely to raise tariffs on imports coming into their countries. Take fruits and vegetables for example. More than six billion pounds of fruits and vegetables were imported from Mexico in 2015-2016. Mexico provides 70% of fresh fruits and vegetables consumed in the United States. Corn and soybeans from American farms move the other direction into Mexico. If a tariff is placed on fruits and vegetables from Mexico, and Mexico retaliates with a tariff of their own, American consumers will suffer from higher prices, and American farmers will find it harder to compete for business in Mexico.

Mexico and the United States trade much more than food products. In fact, industrial products are the largest sector for imports from Mexico. Manufacturing operations vary from Electronics Manufacturing Services (EMS), Contract Manufacturing (CMs), Original Equipment Manufacturing (OEMs), and Maquiladoras.

What’s Next?

A radical change to tariffs on Mexican imports and a renegotiation of NAFTA or outright withdrawal from the treaty could cause much turbulence in the US economy. It could disrupt cross-border supply chains and transform import and export patterns with Mexico. It is unlikely to improve heartland and rustbelt manufacturing jobs that Trump has promised his voters he would bring back. In fact, the United States and Mexico have such tightly interconnected economies that increased tariffs and trade barriers would likely end up causing more job losses all along the US-Mexico border.

And the turbulence doesn’t stop there. Americans will likely end up paying more for everything coming from Mexico or manufactured in higher-cost American factories.  Buckle your seatbelts.

 

I participated in the Women’s March on Washington last Saturday, January 21, 2017. I met my daughter and granddaughter from West Virginia and my grandniece from New Jersey, in Baltimore, the night before the march. This was an experience of a lifetime for all of us.

I left San Jose early Friday morning in route to Washington/Baltimore with a change of planes at DFW. As I was waiting to board at the gate at DFW, groups of women in pink hats started arriving and the mood and energy level changed. Aboard the plane to BWI, my entire row, the row across and the two rows behind me were people going to the Women’s March. Some women were accompanied by husbands, boyfriends and other men supporting the march. Many people (including men) were in pink knitted hats. Some people were giving out pink yarn bracelets. The excitement was mounting. People were energetic and chatty. Everyone had been to the Women’s March web site for information.

It used to be that demonstrations were spread by word of mouth. Take the Chinese students demonstration in Tiananmen Square in 1989, for example. A friend of mine was studying at Beijing University at the time. He heard from a friend who heard from a friend that students were gathering in the Square. There was no internet, cell phones or newspapers to encourage people to go. It was just people telling people. This is the way it was in the 60s and 70s, too. Just people telling people.

This time, word spread over the internet, on Facebook, Instagram, Snapchat and text messaging. The Women’s March had a web site established to sign up so they could get a head count and capture your information for future communications and donations.

Logos were designed and proliferated on banners, signs and t-shirts selling for upwards of $30 by some Chinese vendors. The buildup in the press and on-line was amazing and powerful.

On the morning of the march, we went to the BWI train station for the first MARC train to DC at 7am. I had purchased tickets the night before and thank goodness, because when we arrived at the train station, a little before 6am, there were already several hundred people waiting to buy tickets. We waited on the crowded platform, chatting with other groups from Florida, Texas, Kentucky and California. At 7am, the train came, but plowed right through the station without stopping. An announcer said that although there were only two stops before us, and there were five extra passenger cars on the train, the train was already full. He said that based on estimates, we would probably not get a train before noon. Disappointed, but not discouraged, we took an Uber into Washington instead, arriving in the city about 9am.

The Women’s March and Rally were supposed to start at 10am. It was quite obvious by 9am, that there were going to be way more people than had been anticipated. The official count was 500,000+ and several unofficial counts said 1.2 million. I’m going with a million – it certainly felt that way. There were people in pink hats everywhere, in every direction, on every street and in every driveway. People were sitting on ledges and leaning against buildings. We tried to move toward a jumbotron or the main platform but could not get anywhere close. We were shoulder to shoulder with no room to move in any direction.

At 10am the rally started, including speeches and performances from America Ferrara, Katie Perry, Madonna, Gloria Steinem, Amy Schumer, Alicia Keys, Michael Moore, Ashley Judd, Patricia Arquette, Gloria Allred, Angela Davis, Kamala Harris, Scarlett Johansson and others. We could hear, but could not see the speakers and performers.

After about two hours of speeches, the organizers announced that there were just too many people to march together and recommended the people in our area march forward down Independence Avenue, which we did. We were encouraged to leave our signs at the Trump Hotel or in front of the White House. It had been many hours since we left the hotel in the early morning, so we also waited in long lines for port-a-potties. We brought granola bars, nuts and water with us, thank goodness, because there was no way to get anywhere near to any restaurants.

We marched a couple of miles down Independence Ave. and toward the Capitol and chanted slogans with thousands of others. My favorite chant was “Show us what democracy looks like,” and the reply: “THIS IS WHAT DEMOCRACY LOOKS LIKE.”

At about 4 pm, we headed to the Metro to try to at least get away from the city. Again, it was jammed and after a few trains passed through the station, we managed to squeeze into a Bethesda train. This reminded me of trains in Japan, where you get pushed together by train officials until they can close the doors. We were all smashed together.

Officials who had organized the marches later reported 673 marches had taken place worldwide, with marches occurring on all seven continents, including Antarctica. In Washington D.C. alone, the protests were reported to be the largest political demonstrations since the anti–Vietnam War protests in the 60’s and 70’s, with both protests drawing similar numbers. The Women’s March crowds were peaceful, and no arrests were made in Washington, D.C. I heard on the news on Saturday night that officials also said this was one of the cleanest events ever. Apparently women tend to clean up after themselves.

This was the kind of event you remember you entire life. I am so glad I could go with my family, especially my 12-year-old granddaughter. There were many lessons to learn about our democracy.