TRADE WAR’S INNOCENT VICTIMS
Kevin Carmichael highlights why ‘tariffs are an incredibly blunt instrument.’
The instability of policy related to economics in the U.S. is not healthy for the worldwide economy.
Part of an ongoing series that looks at changes one year after the global trade wars ignited. Like real ones, the trade wars are being conducted on multiple levels.
There’s the phoney war on Twitter, where Tariff Man goes to whip up his followers and rattle the nerves of his enemies.
A more sophisticated contest takes place in hotel conference rooms, the fighting pits of diplomacy. Negotiators go at each other for months, arguing over arcana such as rules of origin and tariff-rate quotas. Also in the frame: “stakeholders,” the trade-war equivalent of arms dealers, who wrap themselves in the flag, obfuscating their true allegiances.
The most brutal conflict takes place on the ground, out in the real world, where unwilling conscripts are required to rewrite business plans, abandon supply lines, find new customers, hire people to keep up with a spike in demand, fire people they’d rather keep, watch profits soar, despair as orders suddenly disappear — all because Donald Trump won 80,000 more votes in Wisconsin, Michigan, and Pennsylvania than Hillary Clinton, and because Canadians had begun to take preferential access to the world’s biggest economy granted.
“I don’t like where the economy is at,” Robert Piccioni, founder and chief executive of Fuel Transport Inc., a Montreal-based logistics company, told me in an interview this week. “The instability of policy related to economics in the U.S. is not healthy for the worldwide economy.”
While Piccioni and I were on the phone, Trump tweeted that on Sept. 1, he will apply 10 per cent duties to the US$300 billion of Chinese imports that aren’t already subject to tariffs of 25 per cent. That caused stock markets to tumble.
Earlier in the week, the Federal Reserve cut its benchmark interest rate by a quarter point, citing the trade wars as the primary reason. That caused foreign-exchange markets to gyrate. In the middle of all of this, Congress adjourned for its summer without ratifying the new North American free trade agreement. That means at least a few more months of uncertainty.
This is global commerce on the eve of the second decade of the new millennium. Best get used to it.
“These are tremors,” Cory Carson, president and founder of Border Bee, a customs brokerage, told me in an interview. “We are going to see constant upheaval in the future.”
What might such a future look like? A new analysis by Statistics Canada of our skirmish with the U.S. over Trump’s specious steel-and-aluminum duties may hold some clues.
Companies stockpiled like mad before Canada’s retaliatory duties went into effect on July 1, 2018. Steel imports from the U.S. were $604 million in June, 30 per cent greater than the monthly average in 2017; imports of the miscellaneous consumer goods on the target list jumped to $824 million, a 19 per cent increase from the previous year’s average; and aluminum rose about 13 per cent.
Those numbers jive with Piccioni’s memories of that period. “We had this wave of demand, with the economy revving at full speed,” he said. “In general, capacity was extremely tight. We couldn’t buy enough trucks and put enough drivers on the road to accommodate everybody. That was industry wide.”
At first, the surge in business confidence that followed Trump’s tax cuts in 2017 appeared to explain what was happening. But the positive vibe gave way to a sense of desperation, as executives recognized that Trump was serious about tariffs.
Piccioni’s costs rose because he had to pay higher wages to secure drivers, yet his own ability to charge more was constrained by competition from Amazon.com Inc., which was pushing hard to win market share in the logistics business. And then the orders dried up.
Statcan’s numbers capture the shift. The average monthly value of steel imports between July 2018 and May 2019 was about $324 million, a 30-per-cent plunge from the 2017 average. The change in trade flows of the other goods was less violent. Imports of the miscellaneous items dropped 11 per cent from their 2017 average, while the value of aluminum imports was about four per cent lower.
“We have steel manufacturers that we do quite a lot of business with,” Piccioni said. “You go from 50-75 loads a week from these suppliers to nothing once the tariffs are imposed,” he added. “You are hearing the rumblings. You are expecting the volume. The tariff card is played and all of a sudden it effects your weekly numbers, your monthly numbers.”
It’s worth noting that steel — which faced a border tax of 25 per cent — was the only tariffed import whose trading patterns changed dramatically.
That raises some questions, including the effectiveness of Canada’s approach to tit-for-tat retaliation. The list was carefully crafted to inflict pain in the districts of influential American legislators. It’s unclear that the 10-per-cent duty charged on the majority of the tariffed goods caused more than minor irritation for U.S. exporters. Carson observed very little substitution by Border Bee’s clients, mostly smaller companies that lack the means to seek out new suppliers. Some started showing a preference for “Made in China” over “Made in the USA,” although they continued to rely on the same U.s.-based suppliers. Most just paid the duties, assuming they could charge more. Sometimes that worked, but not always.
“It was totally new to them,” Carson said. “Tariffs are an incredibly blunt instrument.
Half the time, you aren’t targeting the right people. You are punishing all kinds of people who have nothing to do with the trade war.”
The number of innocent victims may explain why outfits such as the Fed are starting to worry so much about the state of the economy. There’s something wrong, said Piccioni. Orders have rebounded from the post-tariff stall, but not fully. I asked him why? He said the economy has been hobbled.
“It’s like you are running a race and someone comes and chops at your right leg,” Piccioni said. “You fall and you eventually get through the pain. Once the pain is gone, you get back up and run, but you just aren’t running the same way you were before you got knocked down.”