Bad math

Across-the-board tariffs short-sighted, bring uncertainty to the economy

By Dale Kooyenga
MMAC President 

Less than a week after the Trump administration announced its plans for across-the-board global tariffs, investment portfolios have been hammered, nations we’ve historically considered neighbors and allies have been spurned and confusion has reigned.
It’s been an unprecedented period in our lifetimes. 
In talking, texting or emailing with more than 175 member CEOs since the administration’s “Liberation Day” announcement, one thing is certain – concern is widespread among area business leaders. 

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What’s the end game?
The multi-trillion-dollar question is this: Does Trump truly believe that American tariffs will lead to additional prosperity? Or do they serve as a negotiation tactic to secure more favorable trading terms for the United States? 
If Trump believes tariffs will lead to additional American prosperity, the mindset would run counter to the MMAC business leaders I’ve spoken with, as well as most mainstream economists who vehemently disagree. 
With few exceptions, tariffs are associated with slower or declining economic growth. 
But why?
Quite simply, tariffs are taxes, and a $600 billion tax increase will be a drag on the economy. To put that into perspective, $600 billion depletes more money from the economy than U.S. corporate taxes generate. It takes a creative mind, divorced from economic realities, to think tariffs of that scope would not lead to inflation. 
Taking action against a country like China is one thing. Their largest companies are state-owned, and even those that aren’t are controlled by members of the communist party.  They have manipulated their currency and abused their American welcome to the world stage by taking advantage of the international free market. 
For instance, China's state support for its steel industry is an example where America has been wronged. Fighting to protect America's steel industry from Chinese domination is a worthy endeavor. China’s steel production is now larger than the entire U.S. output. In fact, it produces as much steel as the rest of the world’s countries combined. More narrow trade battles to protect America's defense industrial base and fight these clear abuses are generally supported by the business leaders I spoke to.

Why are we targeting friends?
The majority of countries targeted by the Trump administration are longstanding allies and strategic partners. Several executives told me the tough talk delivered by Trump toward our allies is already hurting our goodwill in the marketplace. They said those purchasing American products – other governments, international business and consumers – may quietly boycott American goods due to the treatment they’re receiving. 
And then there is the uncertainty.  Decisions made by businesses require a certain degree of confidence.  The unpredictability and chaos caused by the breadth and speed of the tariffs make it difficult for organizations to understand their cost structure and sales prices. This means less economic growth.
Business executives would rather have competition and economic growth versus an economic slowdown and less competition.  

Trump arguments don’t stand up
Trump and his administration argue that we need to bring our trade deficit into balance. But as the richest economy in the world, a trade deficit is not necessarily a net negative. In fact, for many trade partners representing less developed countries, trade balance with the United States is an impossibility. While those partners may provide goods that we either can’t produce here (think coffee) or produce cheaply, their inhabitants don’t have the means to purchase American-made goods at those same levels. 
Simply put, the trade deficit represents the accumulation of thousands, or millions, of transactions in which businesses and consumers are making decisions in their best interest.
Trump has also argued that his tariff policy will reinvigorate U.S. manufacturing and return jobs to our shores. Here’s the rub: It takes three to five years to build a factory here based on the complexity of the product and regulatory barriers in the industry.  The U.S. cannot significantly boost production even under the best circumstances.  
We’re also dealing with a labor shortage. If the intent is to return manufacturing to the US, there have to be legal immigration reforms to provide a greater labor pool.  Technology can provide automation, robotics and AI to augment labor, but higher-margin manufacturing is in smaller batches and relies more on skilled labor versus mass labor, especially true here in the Milwaukee region.  

​Honoring deals, honoring norms
Business executives I’ve talked to want to ensure a deal is a deal. During his first term, the President replaced the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement. That agreement, with two of our largest trade partners, is largely still intact and exempt from “Liberation Day” tariffs.  It’s extremely important that agreements we’ve entered are honored to maintain their sanctity – and with it their certainty - so businesses can invest accordingly.
Lastly, Congress has to be involved in these decisions.  We are a nation founded on “no taxation without representation.” Tariffs are taxes and the power to levy taxes is constitutionally held by the legislative branch.  We are engaging our congressional delegation, and they have limited power to act, which was not the intent of the framers. All citizens, businesses and associations have the right to provide input to their representatives on how government policies impact them. In turn, they should have the courage and power to intervene on behalf of their communities' best interest.