The Trade War Comes to Montana

In early 2018, the Trump administration announced its first round of trade tariffs – none of the administration’s trade policies have been ratified by Congress. The first round began in January 2018 on consumer appliances, and was quickly followed by tariffs on imported steel and aluminum. In May 2019, an additional $50 billion in tariffs were added on Chinese imports. The repercussions of these restrictive trade policies resulted in predicted retaliatory tariffs on U.S. exports.

The impacts of these tariffs are being passed on and paid for by U.S. consumers – because tariffs lead to higher domestic prices for protected goods. A recent study by the Peterson Institute for International Economics found that tariffs on steel and aluminum imports are costing the U.S. economy an astounding $900,000 per job saved. Similarly, economists from the University of Chicago and the Federal Reserve found the cost per a job saved to be about $815,000. Another study conducted by economists from the New York Federal Reserve, Columbia and Yale found that 100 percent of the tariffs are being passed onto consumers in the form of higher final goods prices.

But U.S. tariffs on imported goods are only half the story. They have sparked a trade war – which are far from easy to win – and other countries have retaliated with tariffs of their own on U.S. exports.


 

In response to tariffs on Chinese imports, China has severely restricted imports from U.S. sources, primarily in manufactured and agricultural goods. Because tariffs were done unilaterally, other countries have simply substituted U.S. exports for third country exports. For example, China shifted consumption of U.S. soybeans to those produced in third countries like Brazil. In 2016-17, U.S. soybeans accounted for about 60 percent of Chinese imports, while Brazil’s share was just over 30 percent. By 2018-19, Brazil’s share was roughly three-fourths of Chinese imports and the U.S. export share fell to 10 percent.

This is significant – before the trade war soybeans were the largest agricultural U.S. export to China. Montana’s largest export to China is wheat, which through August 2019 has declined 90 percent compared to 2018 to $10.3 million.

Figure 1. Annual growth rate of real exports and imports. Sources: Bureau of Economic Analysis and Federal Reserve Bank of St. Louis.
Figure 1. Annual growth rate of real exports and imports. Sources: Bureau of Economic Analysis and Federal Reserve Bank of St. Louis.

None of these measures have improved the U.S. trade deficit, the plausible reason for raising tariff barriers. If anything, the deficit is widening.

According to the most recent data, U.S. exports are falling faster than imports. Figure 1 shows and annual percent change in exports and imports adjusted for inflation from 2012-19. There is a distinct decline in export growth beginning in the first quarter of 2018, which began to shrink in 2019. Import growth has slowed, but not yet started to fall.

But tariffs are not the whole story on the decline in U.S. exports. With tariffs comes an appreciation of the U.S. dollar versus other currencies. Tariffs reduce the relative demand for foreign currency. Imports are more expensive, which causes the dollar to strengthen and makes imports less expensive for U.S. consumers and U.S. exports costlier for foreign consumers.

Finally, while the U.S. is relatively less reliant on trade, which accounts for about 27 percent of economic activity, for other trading partners the percent of GDP exposed to world markets is higher. For example, South Korea’s exposure to trade is 83 percent of GDP. By restricting imports, U.S. tariffs may cause these economies to slow down, further reducing demand for U.S. exports.

The end effect of the ongoing trade dispute is a slowing down of overall global economy. The subtitle of the International Monetary Fund’s October 2019 economic outlook is “Global Manufacturing Down, Rising Trade Barriers.” The combined effects of these two factors have reduced the 2020 global forecast from 3.3 percent in April to 3 percent today. Moreover, the growth rates for the U.S., Chinese, European and Japanese economies are estimated to be below the global growth rate average through 2024.

Effects of Trade Policy on the Montana Economy
The impact of mercurial trade policy tied to tariffs can be felt broadly across Montana. Farmers and ranchers are experiencing decreased market opportunity and manufacturers are facing increased input costs that must be passed along to their customers.

To provide further insight on the impact of U.S. imposed tariffs, let’s highlight a few case studies of the effects on Montana’s farms and businesses.

First, let’s consider Montana’s manufacturers using steel and aluminum for their finished products. Industrial equipment manufacturers across the state rely on steel and aluminum to fuel their businesses.

One small business owner stated, “Montana manufacturers are already at a disadvantage due to geographical remoteness, which results in increased shipping costs. Increased raw material costs due to tariffs adds insult to injury. Raw steel prices doubled for us seemingly overnight. It wasn’t something we could have planned for. We had no choice but to increase the price to our end users accordingly… In the longer term, all of this uncertainly really impacts our ability to make capital investments or even think about expanding.”

Another Montana-based firm selling outdoor retail products globally recently shared similar concerns in a Washington Examiner article. It sheds light on the cumbersome process of pursuing tariff exemptions.

“We are certainly hopeful that our petitions are successful, but it will likely be months before we know the outcome, and in the meantime we need to make important long-term business decisions,” said Ben Christensen, senior director of development at Simms Fishing. Christensen added, “We launch products about seven to eight months prior to actually shipping our products to customers. We have salesmen who go out and give our retailers an advance preview of the products that are coming, so they can write hard orders for them… So, we’ve already written a lot of orders for spring 2020. Normally, once those orders are written they’re firm.”
Turning to the reshoring argument (the practice of bringing manufacturing and services back to the U.S. from overseas), another longstanding Montana firm with global operations and predominantly China-based supply chain reports that the net impact of tariffs on its bottom line will be nearly $1.2 million in 2019 – that’s with an exemption to a 25 percent tariff it was able to secure on a primary input. Firm management and others describe a backlog created by tens of thousands of exemption requests filed with U.S. Customs and Border Protection, meaning the 90-day ruling period has been extended in some cases by months. Nonetheless, reshoring isn’t a viable option in the near term.

“We’ve worked for decades with tens of millions invested to build and refine our supply chain partnerships. That work and those relationships just can’t be recreated overnight. And even if we did finally make the decision to try to source from suppliers from elsewhere or to reshore operations here in the U.S. at the cost of two times over our current investments, who’s to say that a deal won’t be made tomorrow with China? That puts us at a substantial competitive disadvantage relative to our competitors who are largely choosing to wait out the storm.”

Finally, there’s Montana’s front line in international trade – agricultural producers that operate in a local and global market. As China predictably retaliates against U.S. imposed tariffs with countervailing duties on agriculture, Montana’s producers are hurting. Despite efforts to cushion the blow with some relief – the Trump administration extended farm aid over 2018 to 2019 to $28 billion – direct payouts do not make up for total lost revenue. They also do not address the long-term financial consequences of losing major markets like China – a country to which Montana exported over $65 million of wheat in the market year prior to the start of the current trade war.

Michelle Erickson Jones’ experience is echoed by many agricultural producers across Montana when speaking about the impact of trade policy to Congress.

“China is the world’s largest wheat consumer with a significant trade opportunity in their market. In market year 2016-17, China was our fourth-largest customer. But when China placed a 25 percent retaliatory tariff against U.S. wheat, not one new shipment has been purchased from the United States since March, and the last shipment arrived in June… There have been very few issues in my career as a farmer that have caused me to lose sleep. But these tariffs are one of them.”

Since March 2018, with the exception of a single, small purchase by a private company, China has continued to source wheat from our top competitors in Canada and Australia. Recently, China returned to international markets to purchase soft white wheat from Washington, however that wheat has not yet shipped.

References
Amiti, Mary, et al. “The Impact of the 2018 Trade War on U.S. Prices and Welfare – Department of Economics.” Princeton University, The Trustees of Princeton University.

DeBarros, Anthony, and Josh Zumbrun. “Companies Struggle While Awaiting Rulings on Tariff Exemptions.” The Wall Street Journal, Dow Jones & Company, 10 Oct. 2019.

Flaaen, Aaron, et al. “The Production, Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines.” BFI.

Higgins, Sean. “Businesses Seeking Exceptions to China Tariffs Say What They Really Need Is Certainty.” Washington Examiner, 30 Oct. 2019.

Hufbauer, Gary Clyde, and Euijin Jung. “Steel Profits Gain, but Steel Users Pay, Under Trump’s Protectionism.” PIIE, 15 Jan. 2019.

“Montana Wheat Farmer Testifies on the Impact of Tariffs on Agriculture and Rural Communities.” U.S. Wheat Associates.

U.S. National Oceanic and Atmospheric Administration. “Mapping $8.5 Billion in Trade Assistance.” American Farm Bureau Federation – The Voice of Agriculture, 12 June 2019.