Waiting game

Tariffs, trade war create economic unease

Posted on Jul 31, 2018 :: New North , Places
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Posted by , Insight on Business Staff Writer

It’s not a stretch to say businesses that either sell or buy products from other countries are a bit anxious due to the tariffs on imported aluminum and steel imposed by the United States, the retaliatory tariffs imposed by other countries, the trade war that started between the United States and China in early July or all of the above.

“Even if a company is not affected by one of the levied tariffs, they still may be nervous about growing or investing in a particular area because they aren’t sure what will happen next,” says Chad Cotti, an economics professor at the University of Wisconsin-Oshkosh.

While no one knows how long the high-stakes trade tensions will continue, Cotti says businesses still need to find a way to cope. “I think many hope it will be short-term, and they can absorb it, but that might not be the case.”

Two separate trade disputes affecting businesses are underway. In the first one, the Trump administration levied tariffs earlier this summer on imported steel and aluminum, citing national security. In response, other countries levied tariffs of their own on a variety of U.S.-made products, including Mexico’s tariff on cheese.

In early July, Trump announced a string of tariffs against a variety of Chinese-made products, saying China engaged in unfair trade practices. In response, Beijing unleashed tariffs of its own against American-made products, creating a trade war between the two economic powers.

Cotti says something like the current situation has not been seen for a long time since the World Trade Organization is in place to weigh in on trade disputes and help find solutions so countries can avoid levying tariffs.

“Most economists will tell you free trade is beneficial to all countries,” he says.

Understanding tariffs

Tariffs, by definition, are simply a tax placed on imported goods. That extra “tax” makes it more expensive for businesses to make a product using the material covered by the tariff.

Marc von der Ruhr, an economics professor at St. Norbert College, says consumers may play a key role in how long a trade dispute will last.

“The question becomes how responsive consumers are to higher prices,” he says. “For example, if prices rise, the quantity consumers will buy generally falls. The question becomes, how much does that quantity proportionally fall given a certain increase in the price? If people stop buying, that’s not good for the economy.”

Mexico’s decision to levy tariffs up to 25 percent on cheese will hurt Wisconsin dairy farmers and cheesemakers, von der Ruhr says. An estimated 25 percent of all U.S. dairy products are sold annually to Mexico. If Wisconsin-made cheese costs more in Mexico, shoppers there may choose another variety instead, he says.

“The industry is already dealing with record-low milk prices,” he says.

Some businesses are being hit on all sides by the tariffs. For example, if manufacturers use aluminum or steel, they not only need to pay more for their materials (domestic steel and aluminum prices have also risen due to increased demand), their product may now cost more overseas, so fewer people may purchase it.

That’s the dilemma motorcycle manufacturer Harley-Davidson faced, von der Ruhr says. The Milwaukee company responded by announcing plans to move some production offshore.

“The cost of producing the motorcycle here and exporting to Europe under the new tariffs Europe has imposed rose by more than $2,000 per bike,” he explains. “It seems that it is more cost effective for H-D to decrease domestic production and shift it abroad to ‘tariff jump.’”

Cotti says while steel and aluminum manufacturers benefit from the tariffs on imported materials, many more businesses feel the downside.

“For businesses, it costs more to produce their item, whether it’s an aluminum beer can or a motorcycle,”
he says. “Since companies will likely need to increase the price for their final product because it costs more to make, fewer consumers may purchase what they are selling.”

If the tariffs last beyond a few months and continue to eat into the bottom line, Cotti speculates other U.S. manufacturers may cut workers or follow Harley’s lead and move production.

“There is some unfairness in the current trade situation since some countries, like China, support various industries so they can sell their products at a more attractive price overseas,” Cotti says. “These tariffs going back and forth will probably not change that.”