TARIFFS AND TWEETS
Keeping a promise that he made during the 2016 presidential campaign, President Donald Trump continues to pick trade fights around the globe by imposing billions of dollars in tariffs on particular imports from Europe, Canada, Mexico and China. Trump says the tariffs intend to encourage investment and drive purchasing back to domestic suppliers, noting that necessities such as food and clothing—along with certain smartphones—have been exempted to spare consumers.
It remains unclear whether the president’s long-term goals are realistic (or even attainable), particularly with China, which in September responded to $200 billion in U.S. tariffs with $60 billion of its own.
And while larger international manufacturers such as Ford and Volvo carry enough muscle, positioning and flexibility to adapt, smaller manufacturers—still in recovery from the Great Recession—find themselves in the crosshairs of an economic showdown between the U.S. and China. As economist Monica de Bolle of the Peterson Institute for International Economics noted in The New York Times, “If you want to spare the consumer so you don’t get this massive backlash against your tariffs, then there goes manufacturing—because that’s what’s left. The irony is, you cannot spare manufacturing from anything because manufacturing is globally integrated. The sector sources its parts and components from all over the world.”
In light of this, what do smaller manufacturers need to prioritize—and brace themselves for—in the coming months and years in order to survive a global trade war? And, assuming a trade war happens, will the U.S. get what the Trump administration wants for it?
Taking Counterintuitive Measures
Some lobbies for small businesses—such as makers of steel wheels and safes—suggest more tariffs because duties for steel and aluminum raised costs in the U.S. but didn’t affect finished goods made in China and sold here. They’re pressing the Trump administration for additional tariffs that cancel out other tariffs because they assume the president won’t relent on waging a trade war. And if the tariffs stay in place or grow, which countries would be subject to them? Only China? South Korea, Japan and the European Union continue to lobby for exemptions of their own. The administration has everyone begging.
Isolating the U.S. by slapping tariffs on everything is precisely the wrong way to go. Challenging China on some of its unfair trade practices, like that which ruined the polysilicon industry, is essential. But in the bigger picture, the government’s role should be to assist in creating successful companies and industries and to foster best practices through training, education and innovation.
Playing fair, leading in ethics and investing domestically to encourage long-term growth and sustainability is really hard work. The opposite of that—sending nasty tweets, wasting leverage with irrational behavior, getting everyone angry and acting cavalier about it—creates chaos, not opportunity.
Most of the top Fortune 500 companies—places such as Walmart, General Electric, Apple, Microsoft and Google—receive at least 51 percent of their revenue internationally, with a good portion coming from Asia. It is absurd to expect that the most successful large U.S. companies could withstand a trade war with China. It is no wonder, as the Wall Street Journal reports, that big companies are teaming with smaller businesses to help lobby Congress. Only healthcare and taxes engender more lobbying than these tariffs. This affects everybody.
The National Retail Federation’s top lobbyist David French said it well: A trade war upsets “every sector” of the U.S. economy—not just retail. We all stand to lose.
Signs of Encouragement
No matter what happens with trade in North America, will the administration be able to replicate any successes in a trade deal with China? Do we have that kind of luck? Does the U.S. even have the leverage Trump seems to think we do?
In the meantime, what should smaller businesses do? It is safer to assume the worst.
-Develop a strategic plan that assumes current tariff policies will be in place.
-Consider what the consequences would be if tariffs remain at this level for an extended period or if they are increased, as many fear.
-Be ready to pivot if Trump fails to get approval from Congress next year, and/or if the administration is replaced in 2020, and the tariffs are canceled.
-Continue with your pre-Trump strategy on China anyway in order to remain competitive, no matter what happens.
The renegotiation of North American Free Trade Agreement into the United States-Mexico-Canada Agreement offers some encouraging signs that, for all of Trump’s bluster, he really is able to negotiate deals in which all sides find elements they like. Smaller businesses should be thankful for that. But it also seems that the USMCA might have happened in spite of Trump’s insults and threats, which still could have a long-term negative impact on future negotiations. And who knows what the next tweet will bring?
Martin Stein is the founder and managing director of Blackford Capital, focused on dramatically transforming lower middle-market industrial enterprises through exponentially profitable growth. Since receiving his Bachelor of Arts from University of Chicago and his MBA from Harvard Business School, he has had almost two decades of private equity experience. Among other awards, Martin has been honored as the nation’s Private Equity Professional of the Year by M&A Advisor.
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