Jan 28, 2017

Trump's Trade Policy - Striking the Right Tenor

The Smoot-Hawley Tariff Act of 1930 is widely regarded as the tipping point that sent the world into the Great Depression. Punitively high duty rates were applied to all import shipments into the USA. (If you are interested, the law was never repealed and the high duty rates remain in the US tariff book under Column 2, picture below). The world quickly retaliated and protectionists barriers caused markets to dry up, prices to skyrocket, and rewarded inefficient bloated domestic industries. The result was a worldwide economic disaster.

Snap Shot of the US Tariff and Duty Rates
The other end of the spectrum is a TPP style trade deal where national sovereignty, regulations, and duty collection are sacrificed on the altar of "free trade". Trump rightly called the Congress and the Obama administration on the carpet for this disastrously crafted agreement. (Note in the picture, Free Trade Agreements have duty rates listed under "Special" above).

With the election of DJT, the pendulum seems to be swinging back. The balance is usually somewhere in the middle. Decades of bad trade policy can not be undone quickly - to try and do so will be a disaster. Before we institute punitive tariffs, we have to rebuild our manufacturing base, we have to encourage companies to build factories in the US, and we need to make sure we have a workforce ready to take on the jobs.

It is interesting to note that modern factories are mobile, especially compared to the abandoned relics of the 20th century. Factories can be relocated in today's world. After the 9/11 attacks, I had a unique job of driving around NC/SC to visit and tour manufacturing facilities, Plant managers were so kind and took pride in escorting me through the premises to explain their processes.

What became very apparent to me was the modernity and leanness of the manufacturing process. Drive around industrial parks in this nation, you won't see belching smokestacks and railroad tracks behind hulking red brick manufacturing plants, you will see non-descript buildings, quietly producing all manner of products.

Modern Manufacturing Facility - Lincolnton NC
So consider, if you are an American company that has relocated light manufacturing in Mexico, it is not that difficult to move back to the US. An improved business environment, repatriation of money, and the threat of increased US Tariffs is EXACTLY the correct environment needed to swing that pendulum firmly in the middle, where it belongs.