Tariffs & US Manufacturing
As someone whose 40-year career home has been in various leadership roles within manufacturing businesses, I wanted to discuss tariffs from a US manufacturing business perspective. Are tariffs good or bad for US manufacturing? The answer is that “it depends”.
When NAFTA was first introduced, I wasn’t a fan. Why would the US agree to shift our manufacturing base out of the country? I didn’t think it was fair to move manufacturing to unregulated countries for cost advantages.
The US created agencies and laws to protect workers and citizens, such as the EPA, FDA, OSHA, Department of Labor and others. But then manufacturing companies decided not to deal with these requirements and avoid the costs. This created unfair competition. US lost the cost battle, saddled with the meaningful but costly US manufacturing requirements.
Additionally, some other countries have fixed currency rates instead of free-floating currency rates. This also creates unfair trade. Tariffs can right-the-ship and level the playing field. Tariffs tax unfair trade and can make it fair again. However, it needs to be done correctly for it to work and not backfire.
What’s the correct way? Well from a manufacturing business perspective, here’s the right way to implement tariffs:
- Don’t tariff raw materials. As a manufacturing business leader, I want low-cost raw materials such as metals and resins. Adding tariffs to raw materials just hurts the cost line and revenue line of my P&L, I will pass these additional costs on to my customers. If customers aren’t willing to pay the higher price, then my sales will drop.
- Tariff the value-adding processes. Instead of placing tariffs on metals or other raw materials, tariff the assembled and processed products. Aka, the finished product. Don’t tariff the steel, tariff the car. Don’t tariff the copper, tariff the wire. This draws the processing portion of manufacturing back into the United States and will add jobs to the economy.
- Ramp it up. Don’t open the fire hose suddenly. The US can’t flip a switch to add instant capacity. It takes about 2 years to build a new plant and have it producing goods and another 2 years to fully ramp. Tariffs should be initiated at a low level and increased over time. So, start small and increase a certain small percentage amount every six months. This allows US manufacturing to build capacity and lessen the US and global economic impact.
- Matching tariffs. Install matching tariffs against every country that has free floating currency and protective regulations (they prevent child labor, have pollution controls, protect employee safety, etc.). These countries should have reciprocal tariffs placed against them but not be penalized.
- Penalty Tariffs. Install tariff penalties against countries that have fixed currency rates and/or no protective regulations. Unfair trade practices need to be met with additional tariffs. This would encourage some countries to comply with global manufacturing and economic standards.
- Be Targeted. Artisan products don't need tariffs. We can't produce Murano glass, Swiss watches or Mexican pottery. Don't tariff specialty or unique items. It hurts culture without reason.
As a manufacturing business leader, these 6 steps would make me very happy. The playing field would be both fair and competitive. US manufacturing would thrive but still need to operate efficiently to compete globally.
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