Trade War Wounds May Heal Soon

Donald Trump’s vow in 2016 to revive Rust Belt manufacturing may get some of the credit for his razor-thin surprise victory in Wisconsin, but four years later, the real impact has been murky at best.

On the one hand, manufacturing in the Dairy State appears to be holding up better than in many of its surrounding states and even, until recently, the nation as a whole. At the same time, challenges ranging from trade to worker shortages have dampened at least slightly an otherwise enthusiastic community of factory operators.

“The state of manufacturing in Wisconsin is actually pretty good right now,” says Buckley Brinkman, executive director of the Wisconsin Center for Manufacturing and Productivity (WCMP). Brinkman considers workforce development and longer-range strategic challenges among the sector’s top priorities.

The center is a consultancy that collaborates with WMEP Manufacturing Solutions — another networking and consulting organization — and the University of Wisconsin-Stout Manufacturing Outreach Center to aid small and medium-sized manufacturers.

In Wisconsin, manufacturing accounted for $63.3 billion in output in 2018 (the most recent year for which figures are available), just under 19% of the state’s GDP, according to the National Association of Manufacturers. The sector employs about 16% of Wisconsin’s non-farm workforce.

Conflicting measurements complicate assessing how well manufacturing jobs are actually doing, though. Federal government reports don’t even agree on whether the state is starting to lose ground or continuing to expand.

Based on monthly projections from the Bureau of Labor Statistics, Wisconsin had about 473,400 manufacturing jobs in December 2019, a 1% drop from a year earlier.

But Dennis Winters, chief economist at the Wisconsin Department of Workforce Development, says those numbers appear to be off target. The monthly reports, he says, come from surveys that throughout 2019 have “underestimated the Wisconsin manufacturing sector.”

More accurate quarterly reports, based directly on payroll records, have so far outpaced the monthly projections, showing an increase for the first six months of 2019. He expects the state’s third-quarter 2019 report, due by the end of February, to continue that upward trend.

National data also suggests a better picture. For five straight months from August through December 2019, the national factory index from The Institute of Supply Management (ISM) consistently fell below 50, a sign of contraction in manufacturing. Then, in January 2020, it jumped to 50.9, indicating an expansion.

Bolstered by that news, “I don’t see a turndown here anytime soon,” Winters says. “I think we weathered the storm and the angst that was there certainly due to the last half of last year.”

The recent vote in Congress to approve the new USMCA trade agreement involving the United States, Canada and Mexico, along with the first phase of a new agreement in China that allayed threatened tariffs, have further eased some concerns. (The agreement still awaits action in Canada.)

Painful tariffs

In its latest twice-yearly survey of business executives, which was released in January, Wisconsin Manufacturers and Commerce reported that 50% said tariffs were hurting their businesses, up from 47% in mid-2019.

“The trade disputes that have gone on over the past three years have definitely not been helpful to Wisconsin,” says economist Menzie David Chinn of the University of Wisconsin. “Whatever protection we’ve put in is for industries that we don’t produce.”

For example, Wisconsin isn’t a major producer of steel or aluminum, but for manufacturers using those as raw materials, tariffs that Trump imposed in the summer of 2019 of 25% on foreign steel and 10% on foreign aluminum kicked up supply costs.

Even so, 79% of the executives surveyed for WMC said they supported tariffs “as a negotiating tactic to force nations like China to play fair,” the business lobby reported.

Some affected companies that were importing  affected materials and components from China and other countries where the U.S. has imposed tariffs have also made adjustments, seeking out new sources, says Winters of the state DWD.

“A lot of that supply chain has already been reconfigured,” Winters says. “What were significant and rapid changes early on have, to a significant extent, been smoothed out.”

The WMC survey was conducted before Trump signed the Congressionally-ratified USMCA, replacing the North American Free Trade Agreement, and before he and Chinese Vice Premier Liu He put their signatures on the first phase of a new bilateral trade agreement that averted threatened tariffs and promised to open new markets for U.S. goods.

UW-Milwaukee economics and finance professor Richard Marcus expects the USMCA to help manufacturers, including those with operations in Wisconsin — but only marginally.

One source of help, he says, is that the new agreement includes the cost of labor when measuring the content of foreign imports, which determines how much they will be taxed.

“That is supposedly going to help some Wisconsin firms from competition that will be taxed that otherwise would have gotten through,” Marcus says. But, he adds, “I wouldn’t see it as a huge boon to manufacturers” in most instances.

Hope for farm exports

If the China agreement makes good on promises to open up more farm exports to that country, he adds, that could have a wider impact, such as on Wisconsin-based farm equipment manufacturers. Although it’s too early to calculate how significant it would be, Marcus says “anything that helps our agriculture will also help our domestic manufacturers  in those sectors.”

The main benefit from the recent trade settlements, observers agree, will be if they give  manufacturers and other businesses a clearer view of the future. “It’s more the cessation of the uncertainty,” Chinn said.

Brinkman of WCMP says the biggest challenges he hears from manufacturers — and one also spotlighted in the WMC survey — is ensuring an adequate supply of workers now and decades ahead.

“I think we’ve done a pretty good job as a state working on skills and working on recruiting,” he says. The problem is there aren’t enough bodies. The demographics are really against us. We’re getting older … [and] our workforce is going to stay relatively flat for the next two decades.”

Reprinted with permission of Wisconsin Examiner.