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Tariffs in the Time of Precepts

It is no secret that the automotive industry is a major player in the market for plastic injection molds. A 2016 survey created by the Original Equipment Suppliers Association (OESA), in partnership with Harbor Results, Inc., targeted tool & die shops throughout the United States and Canada, and intended to gauge the overall state of the tooling industry. 65 shops, serving 9 different industries with total sales of $1.1 billion made up the sample. Of the $1.1 billion in sales revenue generated, over $880 million; or roughly 82% was claimed by the auto industry. Regardless of the recent growth in the US medical and electronic markets, this data shows that there is no better friend to American tool builders than the auto industry.

Some reading this may recall that we had an election recently to decide a President of these United States. One of the issues continuing to garner favor as a topic of contention relates to the manufacturing industry. In a series of tweets dating back to before the election, President Trump has decided to take aim at corporations responsible for moving manufacturing jobs abroad. While there has been some confusion and ambiguity surrounding these instances of “social governing,” one of the more consistent victims of this tactic is the automotive industry.

One of the methods that President Trump has employed when discussing, or more accurately, tweeting about this issue, is to threaten a 35% “border tax.” This differs from a tariff because tariffs are imposed on products which isn’t the case in this instance. President Trump has pledged to apply the 35% tax to, “…companies wanting to sell their product, cars, A.C. units etc., back across the border.” At first glance, this seems to only apply to US businesses wanting to take advantage of cheaper foreign labor, however, some of these tweets have included Japanese and German automakers as well.

While this previously untested use of the “bully pulpit” may have America’s middle-class workers in mind, it is important to understand that with any political tactic, the value is based on the intended and measurable effect. In unexplored territory such as this, however, the only way to forecast what may stem from such a policy is by looking back through history.

Tariffs are not new; even if this isn’t truly a tariff the idea of taxing something as it moves across a border has a long and somewhat volatile past, especially with regard to the history of the United States. To better understand this unprecedented revival of tariffs we need to study about the last time these “border taxes” played a major role in shaping the political landscape of our country. Odds are that studying these issues will take you to the pre-WWII years ranging from 1929 to 1934. This is not a good sign if you consider the economic state of that period.

The tactic of imposing tariffs in and of itself hasn’t always been viewed negatively. The United States government used tariffs to generate nearly all federal revenue until 1913 and the ratification of the Sixteenth Amendment making the Federal Income Tax permanent. While now primarily viewed as an antiquated policy that can stifle trade and innovation, tariffs had previously been used to protect economies and drive the progress of domestic innovation. The power of government to influence growth and innovation in the private sector has led to many great achievements throughout history (think NASA). However, the way these new “border taxes” are being proposed is a completely untested affair that seems less and less like the use of a “bully pulpit,” and more like plain bullying.

One thing that is shared between bullying and tariffs is that they both illicit retaliation. If we are keeping up with the reading from previous paragraphs I am sure we all understand what happened the last time tariffs dominated policy in the United States. The Tariff Act of 1930, (commonly referred to as the Smoot-Hawley Tariff Act), was a collection of tariffs set by congress during the dawn of the Great Depression. The intent was to counter the early stages of the depression and protect American jobs and farmers from foreign competition. Needless to say, it didn’t work out as planned and a full-blown trade war ensued.

Retaliatory tariffs were soon imposed by the majority of our trading partners, the negative effects of which would go on to expand the depression to the farthest reaches of the globe. By the time legislation was passed to lower these tariffs US exports had decreased by 61% while imports decreased by 66%. Between 1929 and 1932 international trade contracted by one-third. Isolationist and nationalistic political movements thrived, a fact that has led some historians to posit that the popularity of National Socialism (Nazism), while already formidable in 1929, directly benefited from these failed economic policies.

While any theory as to what might occur from the use of these newly rebranded tariffs would be pure speculation, it should be safe to assume that any such action imposed on a trading partner, product, or company would be met with immediate retaliation. The least damaging of these scenarios from a global standpoint would most likely occur if the “border tax” was placed solely on manufacturers through the use of fines and/or penalties. This may cause the affected companies/industries to pass the added costs down to the consumer through simple price increases. However, it is unlikely that all of the costs would hit the consumer as the resulting price hike would most likely damage sales.

Another way to offset these added costs, and the more likely of scenarios, is by further expansion of cost reduction programs. After the recent financial crisis and recession; along with the subsequent bailouts, a great deal of pressure was placed on suppliers that support the auto industry. These pressures were focused on reducing down-channel costs and increasing efficiency. This restructuring led to much leaner costing structures for suppliers, which have ultimately benefited the industry by increasing efficiency. However, many believe that this type of forced attrition has also made suppliers working with the auto industry much more vulnerable to fluctuations.

In the past 10 years, one-third of US mold and tool shops have closed their doors permanently, while employment figures from the US Bureau of Labor Statistics estimate that the industry has lost half its workforce over the same timeline. While the shops that remain have benefited from the shift toward a more efficiently produced product, workforce contractions have spread the industry dangerously thin. Any added strain on current relations between the auto and tooling industries could have serious repercussions for the remaining US mold and tool builders.

As a new chapter unfolds in our ongoing experiment in democracy, those of us in the manufacturing industry remain hopeful. Many feel that American workers are finally receiving the attention that they deserve. That these new policies and feelings of recognition are going to bring about a shift in the political clout of the blue collar worker. However, there are many that also fear the unknown. The desire to explore and discover is tantamount to the definition of being American. We must find out for ourselves what will project us into the future, but we must also never forget the transgressions of the past. Will these measures further the cause of American manufacturing? Or, are we trying to map out an old mine with the aid of a dead canary? We shall soon find out.

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