Manufacturing sector takes a hit in trade war

The ongoing trade war with China, an increase in import tariffs, and uncertainty about U.S. trade policy may be slowing U.S. manufacturing growth. These policies are also not bringing manufacturing jobs back from overseas, according to data from A.T. Kearney.

While the wide range of tariffs that have been put in place since the start of the Trump administration are targeted at a wide range of issues, the promise of reshoring manufacturing jobs has been one of the proposed aims from the beginning. However, there is evidence that the ongoing trade war with China has largely benefitted other low-cost manufacturing regions.

A.T. Kearney’s Reshoring Index has found that a year after the first round of tariffs on Chinese imports, the growth of imports from Asia to the U.S. actually increased by 9 percent in 2018, the largest such annual increase in more than ten years. Production is shifting to India, Vietnam and Mexico in order to avoid tariffs while still taking advantage of lower production costs in those countries.

According to the report: “While it may be too early to judge whether large-scale reshoring will ever result from recent policy changes, U.S. manufacturing has already started feeling negative effects. Steel and aluminum tariffs, for example, have increased input costs and decreased profits. Retaliatory tariffs imposed by China and other leading trade partners have many CEOs evaluating opportunities to shift production out of the US to avoid the impact of tariffs.”

Both Ford and GM cited the tariffs as a cause of the earnings declines in 2018, leading to large-scale layoffs.

A.T. Kearney found that while U.S. gross manufacturing output grew 6 percent in 2018, the growth in manufactured goods imports from the 14 largest low-cost trading partners in Asia rose 9 percent in the same period, the largest one-year increase since the start of the economic recovery.

Vietnam’s exports to the U.S. have doubled since 2013, with that growth rate accelerating in 2019. The A.T. Kearney report found that Vietnam captured approximately half of the $72 billion in import value lost by China. Imports from Mexico to the U.S. grew by $28 billion in 2018, a growth rate of 10 percent over 2017, and the fastest such growth that Mexico has experienced in nearly a decade.

"Rather than incentivizing companies to reshore, the trade war with China has simply accelerated an already ongoing shift toward manufacturing in lower-cost countries such as Vietnam," said Patrick Van den Bossche, A.T. Kearney partner and co-author of the study.

The A.T. Kearney report also noted that reshoring efforts have also been stymied by the high cost of building new factories, and an ongoing shortage of skilled labor that has left many existing U.S. manufacturing facilities scrambling to fill positions.

There has been some positive progress on international trade. Mexico recently passed the updated North American free trade agreement (USMCA), which was received positively by the auto industry.

“Since the Trump administration first announced its intent to modernize our existing trade agreement with Canada and Mexico, the Auto Alliance has reiterated the absolute necessity of preserving the integrated North American automotive supply chain, and maintaining the auto industry’s global competitiveness,” said David Schwietert, interim president of the Alliance of Automobile Manufacturers. “Likewise, it is critical to remove tariffs and trade barriers that hinder economic growth. That’s why we’re pleased Mexico has taken steps to preserve North American competitiveness.”

The Motor & Equipment Manufacturers Association (MEMA) also issued a statement encouraging the U.S. Congress to ratify the agreement: “The USMCA, when ratified by all three countries, will be a welcome update to the North American Free Trade Agreement, which was nearly 25 years old. This new trade deal, which will keep the United States on a level competitive field with the other major manufacturing centers in the world, will serve as a catalyst for further American manufacturing and job growth, foster a high level of economic confidence, and maintain stability in the supply chain.”

However, there are some troubling signs in the overall economy relative to manufacturing. According to a recent IHS Markit U.S. Manufacturing Purchasing Mangers Index (PMI) report, June data indicated “near-stagnation” operating conditions across the U.S. manufacturing sector, with a rollback in hiring and low overall growth.

There was a modest upturn in June, but the rate of increase was among the slowest seen in the past three years. At the same time, tariffs have increased the prices of raw materials.

“US manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009,” said Chris Williamson, chief business economist at IHS Markit. “The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7 percent and factory payrolls falling by 18,000.”

The Institute for Supply Management also reported that is manufacturing index fell to 51.7 percent in June, down from 52.1 percent in May. The index has fallen three months in a row, and is significantly lower than at its peak in August 2018. Inventories contracted while customer orders stayed flat, and export only increased marginally.

In July, the Federal Reserve posted slightly more optimistic numbers, noting that manufacturing production rose 0.4 percent in June, up a bit from May. Most of that growth was driven by a 2.9 percent increase in production of motor vehicles and auto parts. Without the bump in the auto motive sector, manufacturing output grew just 0.2 percent.

Those reports blame at least some of this decline on volatile trade negotiations with China, and President Trump’s recent threat of imposing new tariffs on Mexican imports earlier in the summer. That volatility threatens to derail what has otherwise been the longest expansion of the U.S. economy in history.

Testifying at a hearing before the Office of the U.S. Trade Representative (USTR) in Washington, D.C., in June, representatives from the auto industry emphasized the negative affect of the tariffs.

“Make no mistake about it – these proposed tariffs are a tax on the American public,” said MEMA Senior Vice President of Government Affairs Ann Wilson during the verbal testimony. “We have been contacted by Tier 2 and Tier 3 suppliers, often the major employer in small communities across the country, with concerns about the large-scale 25 percent tariffs moving profitable companies into the red, precipitating bankruptcies and even posing existential threats.”

“Forcing manufacturers to make low technology products domestically would have significant unforeseen consequences on U.S. global competitiveness,” Wilson continued. “These negative consequences impact companies of all sizes but are particularly burdensome on small- and medium-sized businesses.”