What 120 Texas layoffs tell us about China tariffs

Recently, Caterpillar laid off 120 workers at its plant in Victoria, Texas. That concerned us, not just because those are 120 Texans suddenly unemployed, but also because Caterpillar is one of those companies that jumps off the news page. It’s a bellwether. Because the company makes equipment used in construction, its success often forecasts growth. As goes Caterpillar, so goes the economy.

But this news also stands out because of the reason for the layoffs. A company spokesperson blamed “market conditions” and said that trade tensions with China have made customers wary of committing to large capital expenditures. Caterpillar’s Asia-Pacific sales fell 13% in the latest quarter. In other words, the Trump administration’s continuing trade war is having continuing casualties in Texas.

We’ve chronicled in previous editorials how trade tariffs have cost Texas farmers. Now, Texas industrial workers are taking their place in that line.

The economic science here is simple: a trade war makes it more expensive for American companies to do business. In this case, tariffs on steel are particularly burdensome since they affect both Caterpillar’s products (machinery) and the products of many of their customers (buildings). When business gets more expensive in one category, companies cut in other categories. Often that means jobs, wages and benefits. In contrast, we favor giving American businesses the freedom to strike the best possible deals for their employees and customers — a quaint idea like we like to call capitalism.

Late last week, news surfaced that U.S. and China negotiators have agreed to stepping back tariffs. That accord, phase one of a series of tariff de-escalations, can’t come soon enough, because more losses are in store if an agreement isn’t reached.

There’s a familiar metaphor that may help us here: the coal mine canary. Caterpillar is important not because it’s making economic news, but because it’s announcing it. The Caterpillar layoffs could well be a signal of a weakening economy. It would be wise to ignore the chirping of politicians and pay attention to the economic cues coming from the trade war’s front lines. When the canary of economic growth stops singing, the smart move is to get out.