Like so many political issues, tariffs and their economic impact are more complicated than the binary argument that is usually presented by those most invested in both sides of the argument.
The primary pro-tariff argument is that tariffs will bring home manufacturing jobs that have been outsourced to countries with low labor costs.
The anti-tariff argument is usually condensed to “Tariffs are a tax on consumers,” which is as morally vacuous as stating that the abolition of slavery is a tax on consumers.
As I have often stated, I was once a proud free-trader who believed in the benefits of reciprocal free trade, but I soon felt betrayed when I saw that “principled free traders” actually had no interest in reciprocity. Instead, they advocated for “unilateral free trade” – in other words they advocated for a surrender to foreign mercantilism, thus providing foreign countries barrier-free access to the US economy, while also keeping barriers in place to keep US exports out of their countries.
The “Learn to code - your jobs aren’t coming back” attitude of many in the “free trade” camp was especially regrettable, and I know there are plenty of conservatives who now lament the damage done to the concept of foreign trade in general because of the grave dances done by those celebrating blue-collar workers losing their jobs to offshoring.
At Twitter, Scott Adams recently made this comment, ”Tariffs can be a bad idea, unless protecting a domestic industry being targeted by a foreign country. But NOT threatening to use tariffs is a bigger mistake. Trade is a rolling negotiation. And sometimes implementing tariffs is necessary to remain credible.”
If I had to state my opinion on trade now, it would be that I am a “fair trader,” but “fairness” and reciprocity alone are not enough. There are numerous reasons why tariffing a country’s exports makes perfect sense, including for national security, and for a variety of reasons that serve our national interest. If our country’s ability to function can be crippled by just a handful of bad actors blocking the Panama and Suez Canals, then we should re-think how critical it is to export entire supply chains to the lowest-cost overseas producer. A breakdown of supply chains and critical components also leads to a “tax on consumers” as scarcity drives up prices.
In addition, “China, Inc” was another oversold management fad. A great many companies moved manufacturing to China largely because corporate executives saw most of their peers doing so. Many came to regret it to varying degrees. Understanding concentration risk does not require an advanced degree, yet somehow the captains of industry decided they should put as many of their eggs in the Chinese basket as possible.
The Trump tariffs are now giving companies an excuse to unwind their exposure to this fad, and also to extricate themselves from being deeply enmeshed in a hostile country that the United States might be engaging militarily in coming years.
Newell Brands, the manufacturer of Sharpies, is not only aggressively moving operations out of China, but it is bringing many of those jobs home to the United States, specifically to Tennessee. The comments of its CEO, Chris Peterson, make clear that while tariffs are a contributing reason, being concentrated in China was not a good business plan.
“Sharpie-maker Newell moves more operations from China as tariffs loom” [Reuters – 8/06/2024]
Sharpie pen maker Newell Brands is moving some production of kitchen appliances out of China and has relocated manufacturing for its writing business to Tennessee as it faces “uncertainty” on tariffs ahead of the U.S. presidential election, Newell CEO Chris Peterson said in an interview with Reuters.
Mr. Peterson clearly understands that there is not a US political party that is going to fight to remove tariffs against China right now.
“Trump is talking about very large tariffs on China imports,” said Peterson, adding that Democrats are discussing keeping those that are already in place, originally from Trump's first term as U.S. President and expanded this year. “There's a lot of uncertainty. We just want to reduce our exposure regardless of the outcome.
But isn’t domestic manufacturing more expensive?
The cost of transporting shipping containers over the Pacific Ocean from China to the US West Coast has swung wildly over the past four years, ranging from about $4,000 per container to $20,000. It’s hard to budget when the shipping costs are suddenly prone to a 5-fold spike. The costs and hassles of importing from overseas have also been exacerbated by operational backlogs and breakdowns in West Coast ports.
Newell is automating its U.S. manufacturing to make the higher wages in the United States work, he said, adding that moving production to the country also saves on time and volatile freight costs. "If you have a plant that is automated enough, the economics work," he said. "That's our sweet spot."
Meanwhile, shipping through the Red Sea to the Atlantic means your goods will have to navigate through hostile shelling.
U.S. companies importing goods from Asia have faced a series of crises over the last several years, including tariffs, delays and skyrocketing costs during the pandemic, and, most recently, Houthi rebels attacking container ships passing through the Suez canal.
Not all Newell manufacturing operations are coming stateside, but most are exiting China. Some are going to Vietnam, Thailand, and Indonesia. Again, tariffs are a contributing factor, but the need to reduce the concentration of facilities in China is evident.
The Atlanta-based company this year accelerated its earlier efforts to slash its dependence on China for manufacturing, Peterson said on a July 26 conference call with investors. Newell expects to have less than 10% of the company's U.S. business exposed to Chinese manufacturing by the end of next year, versus about 15% currently, Peterson said. Five years ago, the figure was around 35%, he said.
A constant in manufacturing is that improved machine tools will reduce the amount of labor required per unit of production. Those of us who champion domestic manufacturing are not calling for a sweatshop full of laborers sitting at tables, rather we want US workers operating the machinery, and we want to see the country benefit from all the employment created by related jobs and supplier operations that naturally occur around industrial facilities.
The company is in the midst of a productivity initiative, including automating manufacturing, that is aimed at turning the business around and boosting its margins. "We're moving to jobs where people are managing the robots and managing the automation," he said, adding that the change is leading the company to pay higher wages.
"My objective is to get our average wage in our manufacturing plant up significantly, by transitioning our workforce away from manual labor into more skilled labor," he said. "If we do that well, we can repatriate more manufacturing back to the U.S."
Again, there are numerous downsides to tariffs, and I don’t believe that tariffs are the sole reason that Newell is repatriating jobs from China to the US. However, those “free traders” doing chest bumps while taunting displaced workers that their jobs weren’t coming back are starting to be proved wrong. There is a sound business reason to start bringing those jobs back.
[buck.throckmorton at protonmail dot com]