Trump’s trade policy could be costly for US consumers

Bringing back manufacturing jobs by reducing American costs would be good for blue-collar America; doing it by raising duties and tariffs would not be, and it might start a trade war.


WASHINGTON, July 7, 2017 — President Trump said he would bring manufacturing jobs back to the US. According to just-released figures, he is succeeding.

Manufacturing jobs are up for the sixth consecutive month. It appears that some manufacturing jobs, lost due to trade with other countries, are coming back to the US.  While Trump will tout this as a positive, but that isn’t certain.

All else equal, it is a positive when factories expand and closed factories re-open. That creates blue collar jobs and has helped reduce the U.S. unemployment rate to 4.4 percent. Trump hopes to continue this trend and is prepared to impose tariffs on foreign made goods to do it.

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The reason manufacturing jobs left the U.S. is that is less costly to manufacture products in countries like China, where labor is paid much less than American labor.  American factory workers earn on average $20 per hour, while some Chinese workers earn less than $1 per hour.

This huge cost advantage easily offsets additional transportation costs and allows American companies to profitably sell their foreign-made products at much lower prices. Consumers benefit greatly from those lower prices.

The jobs that are returning and the factory expansion taking place are due to companies seeking a more profitable environment in the U.S. Those companies have offset higher labor costs by automating many routine jobs, and they expect a much lower corporate tax rate. Trump says he wants to lower the corporate tax rate to 15 percent.

If those cost savings are not enough to lure manufacturers to the U.S., Trump has another idea: Raise the price of Chinese manufactured goods relative to domestically produced goods by imposing tariffs and duties on imported goods. He has said that the tariffs could be as high as 35 percent of the final price.

Tariffs add to the cost of the foreign made goods, making it more expensive to produce outside of the U.S. Manufacturers will then have an incentive to return to the U.S. The problem is that consumers will pay more for the products. Tariffs help manufacturers but hurt consumers.

A recent U.S. Commerce Department action highlights this problem. On June 26, the Commerce Department announced that “exporters from Canada have sold softwood lumber in the United States for 7.72 percent to 4.59 percent below fair value based on factual evidence provided by interested parties.”

Further, “These preliminary AD (antidumping duty) rates are in addition to the preliminary countervailing duty (CVD) rates that the Commerce Department assessed on softwood lumber on April 24, 2017.  When combined the applicable duty rates range from 30.88 percent to 17.41 percent.”

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The dumping complaints were filed by 13 of largest American lumber producers who said they are losing sales because Canadian companies are under-cutting their price.  If this continued, they would have to reduce production and layoff hundreds of Americans.

While the Commerce Department will announce their final determination in September, they will likely impose a tariff or duty up to 30 percent of the price. The higher Canadian lumber price will allow U.S. manufactures to continue to compete.

But what about consumers?

Millions of U.S. consumers will have to pay more for lumber. That means house prices will rise. Apex Modular Homes recently told their builders that because of the proposed tariff on lumber, “effective immediately Apex will be implementing a $.70/ft2 surcharge on all new house quotes.”

For a 2000 square foot house, the tariff adds $1,400 to the cost of a new home.

President Trump is in a difficult position. He wants to bring manufacturing jobs back to America, which is a good idea. But he should do it by lowering the corporate tax rate, removing burdensome regulations and encouraging manufacturing efficiencies, likely though some automation. Placing tariffs on foreign made goods will result in higher prices for consumers. That’s not good.

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