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The Trump administration’s tariff hikes are a lever for bargaining. The nations that export to the United States won’t like it, so it’s in their interest to agree to what President Trump calls more “reciprocal” trade relations. But what happens if those nations don't blink? Instead, a new normal of higher tariffs is possible. Some companies are already adapting. A Missouri maker of nails, affected by Mr. Trump’s tariff on imported metals, has laid off 60 workers because of slower sales. Harley-Davidson said it will produce more motorcycles outside the US to avoid Europe’s retaliatory penalties on US exports. Those are hints of how such a new normal could slow economic growth. It’s true that, if trade declines, then domestic production should reap some offsetting increase. But companies may not invest unless they’re confident this new, more closed economy will persist. Ben Reif, who runs a manufacturing firm in Wisconsin, says, “I think what Trump is up to is completely unnecessary risk. To run a good business, you want to eliminate all the risk you can.”
Over the rolling whir of paper and plastic pressed together to make food labels, Ben Reif makes no bones about his dislike for President Trump’s trade policies.
“It’s nuts,” says the president of Wausau Coated, a manufacturing firm here in north central Wisconsin. “I think what Trump is up to is completely unnecessary risk. To run a good business, you want to eliminate all the risk you can.”
Five miles outside of town, on Wausau's County Road W, Will Hsu struggles a lot more.
“From my viewpoint as a farmer, it’s hard,” says the vice president for the family ginseng firm, which exports to China. China has already slapped an extra 15 percent tariff on American ginseng imports in retaliation for Mr. Trump’s tariff actions. “As a Republican and talking about issues with regulation, I think … governments should find other ways [to protect their economies] than import tariffs.”
In this patch of Trump country, that’s about as far as company executives are willing to go in criticizing the president’s actions. Much of the threatened tariffs have not yet taken effect. And even in industries where they have, such as steel and aluminum, the pinch is only starting to be felt.
It’s as if a large swath of industry is holding its collective breath, waiting to figure out whether Trump is really using tariffs as a negotiating tool to open up foreign markets or as a big iron door to shut out foreign goods. Wanting maximum leverage in simultaneous negotiations with China, the European Union, Canada, and Mexico, the administration – understandably – has not revealed its true intentions.
The challenge is that the longer the tit-for-tat tariffs go on, the closer the US and its major trading partners slide toward a full-blown trade war that slows economic growth for everyone. And if companies don’t know what the president’s true aims are, it’s difficult for them to figure out whether to wait for a negotiated peace or replace their foreign production with US plants.
“If companies are going to invest in new production capacity in the United States, there's going to have to be a calculation that tariffs are not going away soon,” says Edward Alden, a senior fellow at the Council on Foreign Relations in New York. “I don’t think any of us knows the answer to that.”
Perhaps even Trump has not decided. His economics team includes those who want free trade (Treasury Secretary Steven Mnuchin and economic adviser Larry Kudlow), tariffs as negotiating tool (US Trade Representative Robert Lighthizer), and tariffs to boost domestic production (trade adviser Peter Navarro).
The challenge of politics
The administration appears to be operating from a simple premise: A trade war would hurt our partners worse than it would hurt the United States. Thus, they will blink first.
Lately, the stock markets in key nations have tended to support that premise. The S&P 500, a bellwether for US stocks, is up 1.7 percent this year, while the bourses in Toronto and Paris are barely positive and Mexico City and Frankfurt are down 3.5 and 4.7 percent, respectively. China’s stock market has plunged 14 percent for the year.
The complicating factor is that politics, not just economics, drives nations’ trade policies, and no one wants to be seen caving to US pressure. So nations have retaliated with their own tariffs.
"We don't want this to escalate, but we're the ones being attacked," French Economy Minister Bruno Le Maire told a group of foreign journalists this week in Paris. “If the US hits us again with a 20 percent tariff on automobiles, we will respond again."
That tough image is helpful politically. Canadian Premier Justin Trudeau’s approval ratings have jumped six percentage points since March as he’s talked tough on trade, even though Canada’s economy is particularly dependent on the US.
China and other trading partners are using political pressure of their own, targeting farm and other products that come from Trump’s political base. “If the penalties hit Republican states, and if that can make Republicans understand that this policy is unacceptable, so much the better," Mr. Le Maire said.
Some firms cut workers in US
If the domestic political pressure on Trump is negligible today, it’s likely to ratchet up as the tariffs take hold. By adding a surcharge on imported goods, tariffs raise prices. Already, washing machines and school lockers are more expensive. More economic trouble is in store as the current tariffs take hold, especially if the administration follows through with new ones. On July 6, a 25 percent tariff is scheduled to be applied to 800 goods from China.
Companies can point to lost business and even layoffs because of tariffs. Customers have canceled some $2.5 billion in solar installation projects. Steel tariffs have caused the nation’s largest nail manufacturer to let go of 60 workers. On Monday, Harley-Davidson filed papers saying it would move some production to the European Union so it could sell motorcycles there without having to pay an EU retaliatory tariff.
Trump’s threatened 20 percent tariff on imported cars would dramatically raise the ante. A trade war could shave as much as 0.6 percentage points off US economic growth in the second year, according to Bank of America Merrill Lynch. And the costs would be long-term. In March, the Penn Wharton Budget Model forecast a cut in gross domestic product of 0.9 percent by 2027 and by 5.3 percent by 2040.
A steel plant reopens
The administration will be able to point to successes. Steel tariffs on foreign steel have convinced US Steel to reopen a shuttered blast furnace employing 500 workers in Granite City, Ill. On Thursday, the president attended a groundbreaking ceremony for a $10 billion Foxconn factory in Wisconsin (planned before the tariffs) that could employ up to 13,000 workers.
Those successes won’t make up for the losses from slower trade, many economists agree, unless America’s trading partners capitulate. If that doesn’t happen soon, Trump will have to make a political calculation.
“The Chinese are targeting, the Europeans are targeting. They’re going after Trump supporters,” says Mr. Alden of the Council on Foreign Relations. “He’s going to have to ask all his supporters in these places that are getting hit: ‘Trust me. I’m standing tough and it’s going to rebound to your benefit.’ I don't know how long they’re going to believe that.”
• Staff writer Sara Miller Llana contributed to this story from Paris.