Navigating the Trade Wars

Connecticut business leaders are growing increasingly anxious about the Trump administration’s trade policies—concerns reflected in a dampened outlook for the U.S. economy.

Almost half (48%) of those surveyed in CBIA/Marcum’s 2019 Survey of Connecticut Businesses say they are somewhat or very concerned about the negative impact of tariffs and trade disputes.

“It’s simply awful—very destructive,” responded one manufacturer. “Tariffs are the single biggest contributor to increased costs for packaging components and raw materials.”

Rising costs and the volatility of U.S. trade policies were largely responsible for a drop in optimism among surveyed businesses, with 73% now expecting the national economy to grow over the next 12 months compared with 85% last year.

Businesses that are heavily reliant on imported materials or export markets say the uncertainty surrounding trade policy has led to growing reluctance to make major investments.

‘Blunt Ax’

Many, including Waterbury-based Atlantic Steel & Processing, are neither investing nor hiring says company president Joe Vrabely, noting steel prices jumped 40% over a five-month period last year.

While steel prices have since leveled off, Vrabely says Connecticut manufacturers are being hurt the most of any industry sector—a troubling issue given manufacturing’s importance to the state’s economy.

“There’s a lot of apprehension in manufacturing,” Vrabely said

“Manufacturers can handle bad news but they can’t handle uncertain news.”

“Manufacturers can handle bad news but they can’t handle uncertain news.”

Atlantic Steel & Processing’s Joe Vrabely

Tariff-driven storm clouds have been gathering over the U.S. and Connecticut for more than a year now.

“Tariffs are like using a blunt ax to deal with the trade deficit situation,” Stanley Black & Decker executive vice president and chief financial officer Don Allan told business leaders at CBIA’s Made in Connecticut manufacturing summit last October.

“It’s going to do some damage. Tariffs are not the right answer and people are going to start losing their jobs because of it.”

While domestic manufacturing production increased over the last two years, steel and aluminum imports fell dramatically, declining more than $1.4 billion since 2017 according to U.S News & World Report.

Connecticut saw a $381 million decline in steel and aluminum imports during that period, the third highest of any state after Louisiana and Missouri.

Tea Takes a Hit

Fairfield-based Bigelow Tea has felt the impact of two separate rounds of tariffs, beginning with the 10% levy on imported aluminum imposed in March last year.

President and CEO Cindi Bigelow explained the company uses a special aluminum foil to protect its packaged tea. The aluminum is hard to source, with China one of the few available options.

“The volatile oils in over 200 botanicals we buy have to be protected or their flavor and health properties will be significantly reduced,” Bigelow said.

“When the aluminum tariffs were enacted, it had serious impact on our family company. It was one of the major drivers forcing us to take a price increase.

“Now we have just been hit with a 15% tariff on all tea coming from China, which includes our green tea.

“We’re the number one green tea in the country and pretty much all the green tea sold in the United States is from China. When you have the main ingredient you’re using going up 15%, that’s a big hit.”

Bigelow says the company cannot raise its prices again and will absorb the increased costs of the latest tariffs by cutting employee bonuses.

“One way or another, everyone is impacted by these significant cost increases,” she said.

“For our industry and businesses like ourselves, we just take it on the chin. Our employees will feel it more than the customers.”

Slowing Demand

Quinnipiac University’s Christopher Ball says tariffs are slowing demand for U.S. goods while raising costs for American producers and forcing them to find and develop new supply chains.

Ball, director of the university’s Central European Institute, says the Trump administration’s strategy to address trade deficits through tariffs is not working.

“Basically there are some really wrong notions out there that seem to be driving things today,” Ball told business leaders at CBIA’s Sept. 6 The Connecticut Economy conference.

“With China, we’re either selling more stuff or buying more stuff. Somehow, if we’re selling them less than we’re buying from them, we’re losing money. Neither of those pieces are correct.”

As imports become more expensive, it raises production costs and lowers overall spending.

The same is true for banning or reducing imports in general, he said. While there is some domestic boom and short-term GDP growth as imports become more expensive, it raises production costs and lowers overall spending.

That becomes a problem, he said, “because you’ve now forced companies to reallocate all of their resources and you’ve eliminated lower-cost options abroad. It harms your economy’s potential GDP.”

That should be obvious to any company that’s had to readjust its supply chain Ball added. In fact, he said, every company should review its supply chain and develop options to limit risk in any one country.

“Those supply chains won’t undo once this all goes away, which I think it will eventually,” Ball said.

“So if you restructure your supply chain and start buying from Vietnam instead of China, when the tariff war with China ends, you’re not going to just switch back.”

Trade Deficits

Ball said the Trump administration wants to turn the country’s trade deficits into surpluses and force China to treat U.S. companies better, especially with intellectual property rights.

“If these issues are driving the policy, until these get fixed, you’ll probably see the trade wars and tariffs continue,” he said.

The United States’ largest trade deficits are with China, Mexico, Germany, and Japan. For a more complete picture, Ball prefers to look at a country’s overall trade relationship with the U.S.

China is first with $660 billion, with $540 billion in imports. Canada is second at $619 billion—including $300 billion in exports. Of the country’s top trade partners, the U.S. only runs a surplus with Britain, with $66 billion in exports and $61 billion in imports.

“Our trade deficit has gotten worse with China. It’s not being fixed by tariffs.”

Quinnipiac University’s Chris Ball

“All of these countries are our main trading partners and we run deficits with most of them, so you will continue to see policies aimed at reducing trade deficits with those countries,” Ball said.

Are the administration’s policies working? In 2017, all U.S. trade deficits represented 2.8% of GDP, rising to 3% in 2018 and 5% this year.

In the first six months of 2019, Chinese imports dropped 12% while exports fell 19%.

“With China, as you impose tariffs, you get reciprocal tariffs and you also harm the industries abroad where we would like to sell things,” Ball said.

“Our trade deficit has gotten worse this year with China. It’s not being fixed by the trade war and tariffs.”

Other Factors

Other factors also impact trade deficits, Ball explained, including stronger U.S. consumer spending, lower interest rates, and the strength of the U.S. dollar.

“Both of those acts are going to help drive a trade deficit and that is not a bad thing,” he said.

“U.S. interest rates still encourage investment flow into the United States, which most economists would say is a good thing, but it drives trade deficits.

“And U.S. government deficit spending is likely to persist. Therefore the trade wars are likely to persist,” he said.

“We can only hope that Washington will wake up and see what they are doing to companies.”

Bigelow Tea’s Cindi Bigelow

In the end, Ball said, tariffs won’t change China’s actions.

“Maybe it will push them in the right direction, but in terms of fixing the trade deficit, in all likelihood it’s not going to work,” he said.

For Connecticut companies like Bigelow Tea, the end of the trade wars with China and other U.S. trading partners cannot come soon enough.

“We can only hope that Washington, D.C. will wake up and see what they are doing to companies around the U.S.,” Cindi Bigelow said.

“That’s all we can hope for.”