President Donald Trump’s tariffs have affected the US manufacturing sector since 2018. Industry experts have divergent views on the impact of tariffs on the sector. Some believe that tariffs protect the domestic industries from unfair practices of trading partners, principally China. But some others believe that retaliatory tariffs harm global competitiveness.
To clear up the issue, Federal Reserve economists conducted a study on the impact of tariffs on the US manufacturing sector in 2018-19.
Fed finds Trump’s tariffs harmful
The economists Aaron Flaaen and Justin Pierce analyzed the impact of tariff increases on the US manufacturing sector. They considered factors like domestic industry protection, input costs, and retaliatory tariffs to understand the impact.
They found that the manufacturing industry saw adverse effects like a reduction in employment and an increase in prices. This was due to the rise in input costs caused by tariffs. The top three industries affected by increased input costs were aluminum (sheet/plate/foil and rolling/drawing/extruding), steel products (manufactured from purchased steel) and boiler, tank, and shipping containers.
Plus, the foreign retaliatory tariffs reduced the global competitiveness of US companies. The top three industries that were impacted by the counter-tariffs included magnetic and optical media, leather and allied products, and aluminum (sheet/ plate/foil and rolling/drawing/extruding).
These adverse effects were partially offset by the positive impact of protecting domestic industries. The top three industries affected by the reduction in competition in the domestic market include primary aluminum production, electric lighting equipment, and household and institutional furniture and kitchen cabinets.
Fed’s final word on Trump’s tariffs
According to the Fed’s research, the negatives of tariff increases (the rise in input costs and counter-tariffs hitting global competitiveness) far outweighed the positives (domestic protection) due to a globally connected supply chain.
Specifically, the study concluded that “While one may view the negative welfare effects of tariffs found by other researchers to be an acceptable cost for a more robust manufacturing sector, our results suggest that the tariffs have not boosted manufacturing employment or output, even as they increased producer prices.”
Further, the study stated that “While the longer-term effects of the tariffs may differ from those that we estimate here, the results indicate that the tariffs, thus far, have not led to increased activity in the US manufacturing sector.”
The example of the steel industry
Imported steel products have become expensive due to tariffs, which have hit American companies’ input costs. Though the domestic steel industry benefited initially from the tariffs, the industry later got hit by tepid demand and an increase in domestic production capacity. This shows that protectionism can help an industry only up to a certain level. To learn more, read Ross Defends Trump’s Steel Tariffs as Layoffs Mount.
Trump has divergent views
Trump believes that tariffs have brought in more revenues to the US Government. He also thinks that the equity markets have risen following the tariffs.
On December 2, Trump wrote on Twitter, “US Markets are up as much as 21% since the announcement of Tariffs on 3/1/2018 – and the US is taking in massive amounts of money (and giving some to our farmers, who have been targeted by China)!”
In the current year, the S&P 500 Index (SPY) has risen by 29%. While Trump believes tariffs have boosted equity markets, most participants believe that easing trade tensions have driven the market. To learn more, read Dow Jones 2020 Outlook: What’s Next after Trade Deal?
The technology sector, which has increased by 48%, has driven the rally in the market. Though the industry has consistently faced the heat of the trade war, recent trade talks between the US and China have supported tech stocks. The communication services and financial sectors have also surged by 31% and 29%, respectively.
However, the energy sector has noted the lowest gains. This is due to lower oil prices over the year. Plus, the tariffs and counter-tariffs created fear of a global economic slowdown, which has impacted the oil demand forecast.
Nevertheless, leading analysts expect oil prices to rise marginally in the next year. The expected rise is a result of easing trade tensions and OPEC’s stance. OPEC and its allies have decided to deepen their production cuts to remove the extra barrels of oil from the market.
What does the manufacturing data suggest?
The US manufacturing PMI data from ISM (Institute of Supply Management) showed continued weakness. The manufacturing PMI fell to 48.1% in November from 48.3% in October. PMI data showed a fourth consecutive month of contraction. The fall was due to the decline in demand, consumption, and inputs.
ISM Chair Timothy R. Fiore said, “Global trade remains the most significant cross-industry issue. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Fabricated Metal Products is the weakest. Overall, sentiment this month is neutral regarding near-term growth.”
Employment also impacted
According to the ISM report, employment levels have fallen due to higher tariffs. Likewise, the trade war between the US and China has impacted the demand for farm equipment. Trump’s tariffs and countermeasures by China have affected workers as well as farmers in a big way. Workers are losing jobs as the demand for farm equipment is falling. Farmers are facing the heat of falling prices due to suppressed demand. There have been massive layoffs and shift cuts in the farming industry.
The ISM employment index fell from 47.7% in October to 46.6% in November. Many industries reported a decline in employment. That said, the overall US job market has been quite strong this year.
Trump tariff takeaways
It seems that Trump’s efforts to raise revenues for the government and protect domestic industries have come with a decent share of side effects.
Now, though there is uncertainty surrounding the trade talks, equity markets are hopeful that both sides will eventually resolve the issues. However, if things go sideways, then, as the Fed study pointed out, the manufacturing sector will suffer more pain with falling employment and rising prices.