In his book The Art of the Deal, Pres. Donald Trump described his communication style as “truthful hyperbole.” Hyperbole, sure. Truthful, questionable. Take Trump’s recent speech in Pennsylvania where he declared that his tariffs had turned things around for the domestic steel industry. He also claimed the unratified United States-Mexico-Canada Agreement — USMCA or the “new NAFTA” — and his steep Chinese tariffs would also bring jobs back to the United States. Are the Trump trade policies bringing about a manufacturing revival?
Over the course of the past year and a half, the administration has imposed tariffs on metals, along with many other intermediate and final goods. Part of the USMCA would require that more auto parts be made in the United States and more compensation be subjected to higher minimum wages in order to benefit from the zero-tariff rate among Mexico, the United States and Canada. When faced with a steep penalty for buying foreign goods, the belief is that consumers and both foreign and domestic companies producing goods in the United States will have no choice but to buy everything they need here at home.
That’s unlikely. There’s a reason why businesses set up their supply chains globally instead of domestically. It allows them to get the highest-quality parts for the lowest prices. When production becomes more expensive in the United States, businesses raise their prices and are less competitive.
Consider the automobile industry. When and if the USMCA becomes the law of the land, automakers will face higher costs. That’s on top of the metal price hikes thanks to Trump’s tariffs. Some auto producers might change their supply chains to conform to the new trade deal, but others might decide instead to pay the current 2.5 percent tariffs on imported parts. Either option raises production costs as well as prices in showrooms. And fewer automobiles are produced in the United States.
As in many other industries, the auto industry’s future is in exporting. Raising U.S. auto-production costs makes it more difficult for companies producing cars here to export them to countries where consumers can choose not to buy Trump-induced expensive cars. This reduction in the U.S. automobile industry’s competitiveness may force some domestic and foreign companies to increase offshoring certain sectors of the auto industry, likely to Asia. Over time, the U.S. auto sector will shrink.
Admittedly, this offshoring may take a while if the U.S. economy is still strong, especially compared to the rest of the world. Partial credit for this strength goes to the Trump administration, which passed tax reform including a cut in the corporate tax rate from 35 percent to 21 percent. That triggered an increase in capital investment and a hike in wages. However, this effect is winding down. The tax cut also prompted a few U.S. companies to move their corporate address back to the United States, but that didn’t create new jobs.
While the Trump administration is always happy to brag about anecdotal cases of companies relocating to the United States, the actual overall numbers tell a different story. For instance, Toyota recently announced a large U.S. investment, though the rate of foreign investment here — including investment from Japan — has slowed under Trump. Constant uncertainty about the trade war, new Chinese tariffs, the threat of additional auto tariffs and the global slowdown played a prominent role in this decline.
Chinese tariffs have also failed to bring back jobs. The data show that in most cases, when firms move out of China, they aren’t relocating to the United States, but to Southeast Asia. Even the U.S. Commerce Department acknowledges that tariffs are a “challenge” for companies wanting to move production to the United States.
More troublesome for Trump is the fact that the manufacturing sector is showing signs of a slowdown. The latest U.S. jobs report showed manufacturing employment rose by “an average of 8,000 jobs per month so far in 2019,” compared to an increase of 22,000 jobs per month in the sector during 2018. A recent survey shows manufacturing contracting in August. Even the heavily protected steel and aluminum sectors have started to see a decline in jobs this year.
So, while Trump’s hyperbolic communication style may be entertaining, it certainly shouldn’t be taken as factual.
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Virginia.
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