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    August 6, 2019

    Manufacturing Recession Amid the U.S.-China Trade War

    Of all the problems that the manufacturing industry has to deal with, industry leaders would hope that the price of their products isn’t one of them.

    Now, with the trade war hitting the industry hard, many economists are pointing to the manufacturing recession as a red flag for a larger economic slowdown.

    Why is the manufacturing industry facing a recession? It all comes down to two things: tariffs and supply chain.

    The Current State of (Trade) War

    The current president has complained about Chinese trading practices since he took office in 2016. The past three years have seen a steady escalation in pressure with all the rumbling of a far-off avalanche.

    The trade war began in earnest on March 31, 2017, when President Trump signed two executive orders. One orders a review of United States trade deficits and their causes, while the other calls for tighter tariff enforcement in anti-subsidy and anti-dumping trade cases.

    The first tariffs imposed under the trade war were implemented on January 22, 2018. They covered all imported washing machines and solar panels (not just those imported from China, the continuing target of the trade war).

    On March 8 of that year, President Trump ordered 10% tariffs on aluminum imports and 25% tariffs on steel imports. Again, these were blanket tariffs and did not cover Chinese imports exclusively. Nonetheless, China responded in kind, imposing up to 25% tariffs on 125 U.S. imports in April.

    From then on, the trade war continued like a game of tennis. The Trump administration announced plans for 25% tariffs on $50 billion of Chinese imports and China responded with plans for tariffs on $50 billion of U.S. imports. The U.S. announced tariffs on $34 billion Chinese goods; China responded in kind.

    Industries Affected by the Trade War

    To date, Trump’s tariffs affect 1,097 products in a range of industries. Some of the worst-hit include:

    • Automobiles
    • Manufacturing
    • Agriculture
    • Semiconductors
    • Consumer electronics
    • Construction

    Multi-pronged trade wars like this are not new. What’s novel about the situation is that President Trump is the first president since the 1930s to pursue a multi-pronged trade war with the U.S.’s biggest trading partners.

    And while President Trump has a generally healthy economy, red flags have been soaring – particularly from the manufacturing industry, which sunk into recession in June after two consecutive quarters of decline.

    How Tariffs Work

    To understand why tariffs are hitting U.S. industries so hard, it helps to understand how tariffs work.

    A tariff is a tax imposed by one country on goods and services imported from another country. They’re used to increase the price of goods imported from other countries, with the goal of making foreign products less attractive than domestic ones.

    The tax is not “paid” by the foreign country (in this case, China). It’s not paid by companies either. Companies that import goods typically go through a middleman, and when goods are hit by tariffs, they’ll see the cost of their middleman’s contract increase.

    Which means companies are now paying more to get exactly the same product.

    The simplest way to offset the problem is to pass on the cost to consumers in the form of more expensive products. This is the most realistic option in competitive markets where supply chains are not easily moved (think about how many parts go into a washing machine).

    The other option is to change suppliers and import from a country that is not under tariffs, which could hurt the foreign country’s economy in one sense. But, again, when you’re dealing with complex supply chains and competitive markets, this is easier said than done.

    Why Manufacturing Is Paying the Price

    When the tariffs cannot be avoided, companies have to eat the cost of the tariff one way or another.

    If supply chains cannot be diverted, companies have two options: to raise prices at the risk of scaring consumers away or to swallow the increased cost of production and accept lower profits.

    If consumers are unwilling to pay higher prices, companies have to make up their profit margins elsewhere. In the case of the manufacturing industry, that means job cuts.

    Right now, the manufacturing industry’s recession is mild. It’s not news, either – it’s a logical consequence of slowdowns and the trade war. The industry can still recover, but if the trade war worsens, so too will the recession.