Island Living – Great; Island Economies – Not So Much.
No man is an island. And no country is either, in the economic sense.
There are few civilizations in the world today that do not rely on trade with other countries to support their economies. Even Fiji, an island almost 1,600 miles away from the nearest mainland, relies on exports to produce jobs and income for its residents.
Global trade has been greasing the wheels of innovation and finance for thousands of years. In fact, any history book will point you to global demand for spices as an instigator of trade.
Way back in the middle ages, the hunt for cinnamon, cardamom, ginger, and pepper sent sailors to the far lands of India. These journeys established trade routes and formed channels for the spread of religion and knowledge.
Hundreds of years later, the tentacles of trade are entrenched in every economy in the world. As the largest economy in the world, the United States imports more goods than almost any other nation.
This clout gives us some bargaining power with trade partners. However, President Trump’s introduction of several trade tariffs may carry some severe unintended consequences.
Cutting Off the Nose…
Take these three headlines seen in the newspaper last week:
“Lumber Prices Soar on Shortages”
“Beer is About to Get Pricier”
“Electrolux Halts $250M U.S. Investment Over Trump Tariffs”
Trump’s most recent tariff plan is to tack a 10-25% tax on all imported steel and aluminum. The idea is that U.S. companies that need these products will be more likely to buy from domestic producers if imports are more expensive.
Unfortunately, the U.S. economy might take a hit if these tariffs are enacted. A twenty percent tariff attached to lumber exported from Canada took effect last fall and housing companies are already complaining that the price of a house is getting more expensive because of it.
… to Spite the Face
Lumber prices hit a record high last week. One homebuilder is quoted as saying he is spending $8,500 more per house on lumber than before the tariff.
We need trade partners for many reasons. The most critical reason is that the ballooning of open global trade over the past decade helped to cut our manufacturing capacity in many industries. New factories or additional lines of manufacturing cannot be turned on overnight.
The lumber tariff noted above coincided with the unfortunate wildfires in the west. Back to back hurricanes in the fall wreaked havoc on ports and railroads, leaving boxcars of needed materials idle. Many U.S. manufacturers may find themselves without enough domestic product available. This means they have to pay more for imports. Higher prices for consumers will follow.
In the past, trade was inspired by the need to get your hands on a product that couldn’t be produced domestically. Spices were farmed only in specific countries. Over time, manufacturing prowess led the U.S. to have the ability to make just about anything its consumers desired.
A Beer and a Shot to the Wallet
But as the lines of global trade expanded, we’ve become much more reliant on imports for the products we consume. Aluminum, for example, is used to house our beloved beer and soda. Steel is a critical component of any car or truck. Most manufacturers plan on increasing prices to save their profits from these higher costs.
If Ford and Budweiser could simply replace the imported metals with those made from U.S. plants, tariffs might be a good solution to propel our economy.
Of course, the devil is in the details. Our capacity to make many of these imported products is much lower than it used to be.
Many steel and aluminum plants have been shut down in the past 10 years. Some industry sources note that U.S. production capacity falls short of the demand for steel and aluminum.
If auto sales drop off due to higher prices, automakers might revert to the days of layoffs and plant shutdowns. Higher beer and soda prices will eat up dollars that would otherwise be spent on food and entertainment.
Investors best fasten their seatbelts for more market turbulence. Some of the topsy-turvy moves will be due to investor sentiment whipping around prices. But some of it will be due to the fortunes of some industries feeling the hit from government actions.