THE WORSENING TRADE SITUATION

The current growing concerns about the U.S. trade environment are focused on two fronts. One is the (hopefully completed) renegotiation of NAFTA, and the other is what some believe could explode into a major trade war with China. As we have written before, President Trump campaigned against what he called “the worst trade deal ever…the job-killing disaster known as NAFTA.” By most accounts, NAFTA (North American Free Trade Agreement) has been quite successful since it was signed into law in 1993. The trade among the three parties to the agreement, U.S., Mexico, and Canada has been in the trillions of dollars, but Mr. Trump Believed (or said he did) that the agreement had caused the loss of many U.S. jobs as industries moved into Mexico, took advantage of low-cost labor, and shipped their products duty-free back home. The concern was somewhat valid. The auto industry has significantly increased production in Mexico, and one in every five cars sold in the U.S. is manufactured in Mexico. Even so, most experts believe there has been more success than failure with NAFTA. The president was determined to revise the agreement however, and threatened to pull out altogether if the U.S. did not get the concessions it wanted. The result was what is now called the US-Mexico-Canada-Agreement (USMCA). While the president has said “it is the most important trade deal we’ve ever made”, that statement raised a lot of eyebrows, since it is difficult to find many major changes and certainly none that would significantly increase U.S. employment.

Under NAFTA, any vehicle could avoid tariffs it was at least 62.5% made in North America. USMCA increases that percentage to 75, which should help the auto workers some, but it is not a life changing increase.

Canada agreed to remove some of the protection they have maintained for their dairy industry. That will open that market for U.S. producers, but it doesn’t’ represent a significant portion of our economy.

There are other minor changes, but nothing that many of us will notice. The countries did agree to sunset the agreement in 16 years. The agreement still must be ratified by Congress which could be problematic, depending on the results of the mid-term elections.

A more serious potential problem is our relationship with China. Using the same logic with which he attacked NAFTA, the president decided to penalize imports from China and has placed a 25% tariff on $34 Billion worth of Chinese imports. This was followed by a 10% levy on $200 Billion of other items, including many consumer products.

China immediately retaliated with a 25% tariff on soybeans and automobiles. The soybean tariff in particular, is going to cause considerable damage to our soybean export market; and currently, Chinese soybean imports from the U. S. are expected to decline by 12%. Obviously, this will hurt Midwestern farmers.

The October 10 issue of USA Today included a story that provided some insights into the hardships that will be experienced by another section of the economy – the “dollar stores”. Many of the products they sell are faced with the 10% tariff, and it will force them to either raise prices or take hits to profitability. (On January 1, the tariff will increase to 25%.) According to the article, 60% of the customers of Dollar Tree and Family Dollar stores have less than $40,000 in annual income and will be negatively impacted by the increases.

Whatever the product, almost no one believes that either side wins a trade war, and this one will be no exception. First of all, we are heavily dependent on China, and in this kind of situation, countries just continue to retaliate until one calls it quits.

Written By: Clifford F. Lynch