The Finance 202: Trump tariffs could drive U.S. factories overseas

THE TICKER

President Trump and Vice President Mike Pence meet with Harley Davidson executives on the South Lawn of the White House last year. (Jabin Botsford/The Washington Post)

President Trump’s tariffs threaten to throw his “America First” vision into reverse, prompting manufacturers to ship production and jobs overseas to dodge new trade barriers. 

That’s one takeaway from the Institute for Supply Management’s July survey, which tracks sentiment among industry executives. It reveals a rising tide of alarm among manufacturers about the direction of the administration’s trade offensive — even before the White House announced Wednesday that it is considering hiking proposed tariffs on $200 billion of Chinese imports from 10 percent to 25 percent.   

“We’re seeing a lot of comments from the respondents about evaluating whether to manufacture something in the U.S. or make it in Canada or make it in Mexico,” Timothy Fiore, chairman of the Institute for Supply Management’s manufacturing survey, said Wednesday, per Bloomberg News. “If the end market is Europe or China … you’re going to want to move it outside the U.S. at this point.”

Ned Hill, an Ohio State University professor who studies manufacturing, tells me he’s hearing the same thing. “Companies I talk to are starting to compare their offshore production pricing to their North American production pricing… Their pricing departments are working overtime and exercising spreadsheets quite actively,” he says. 

They have yet to make any decisions, pending more clarity about where the trade war is headed, Hill says. But for many, shifting production wouldn’t require major investments. He said the Trump administration may be “missing the Rubik’s cube that a modern, U.S.-headquartered global corporation plays with. The big change since 2000 is putting production platforms near major markets… They can ship into any market in the world from any of their other factories.”

The state of play suggest Harley-Davidson — which in June announced it would move some manufacturing abroad to duck retaliatory European tariffs, drawing a tirade from Trump — may be a harbinger of a wider trend. If more U.S. companies follow the motorcycle maker’s lead, the headlines alone would create a political migraine for a president who campaigned on promises to restore American manufacturing might.

Workers at General Motors’ Lordstown Assembly plant in Lordstown, Ohio. (AP Photo/Mark Duncan)

That factory flight is hardly inevitable. The ISM survey showed the manufacturing index in July had slipped to 58.1 percent — it’s the lowest in fourth months, representing a steeper drop than forecasters anticipated. But it remains close to a multiyear high. (Anything above 50 percent indicates companies are expanding.) “The report was not as strong as [last] month’s, but it was still quite strong, despite continued angst about trade policy,” Jim O’Sullivan, chief economist for High Frequency Economics, wrote in a note to clients. 

Others said the relative strength in the report represents a lagging indicator, especially if the trade fight continues to escalate. “The ISM index remains at a high level, consistent with decent growth and strong payrolls, but that will change if the relatively small tariffs imposed so far are followed by the $200B-worth of new levies now under consideration by the administration,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in a research note to clients. “Dumb policy hurts.” And Paul Ashworth of Capital Economics predicted in a note that the manufacturing growth will continue to weaken through the second half of the year. 

Detroit automakers, for example, are showing worrying signs. Ford last week reported that it’s second-quarter profit fell almost by half, and it slashed its outlook for the rest of the year, citing in part rising commodity costs from tariffs. General Motors likewise pointed to spiking steel and aluminum prices as it cut its profit forecast for the year. The specter of an uglier trade war is factoring into a decision the company is struggling to make over whether to close a plant in Lordstown, Ohio — and potentially move that production to Mexico.   

Manufacturers’ anxiety about the trade war was evident in the feedback they offered ISM. About half mentioned tariffs in their general comments, up from a third when the survey started tracking the issue in March, per Bloomberg. Bespoke Investment Group offers the receipts:

The sentiment is also showing up in second-quarter earnings calls. Bespoke reports in a note that halfway through this earnings season, mentions of tariffs by S&P 500 companies that have reported so far have already doubled relative to the entire first quarter.

MARKET MOVERS

Federal Reserve Board Chair Jerome H. Powell testifies on Capitol Hill in Washington on July 18. (Jacquelyn Martin/AP)

— Fed: Expect rate hikes. The Washington Post’s Heather Long: “The Federal Reserve left its benchmark interest rate unchanged on Wednesday, keeping the rate in a range of 1.75 percent to 2 percent, but the central bank said the U.S. economy is ‘strong’ and hinted that more rate hikes are coming soon. [Trump] has urged the Fed to keep rates low, but the central bank is an independent body, and Fed leaders have made it clear they intend to carry out their mandate to keep unemployment down and prices stable without political interference. Fed policymakers think the U.S. economy is on very good footing now and that the historically low rates that were put in place to aid the economy after the Great Recession are no longer necessary. ‘The labor market has continued to strengthen and…economic activity has been rising at a strong rate,’ the Fed said in its statement Wednesday, adding that it expects ‘further gradual increases’ in interest rates.”

From Grant Thornton chief economist Diane Swonk: 

Indeed, per WSJ’s Nick Timiraos: “In all, the Fed’s rate-setting committee used the word “strong”—or a derivative of it—six times to describe the economy and labor markets.”

— Atlanta Fed boosts GDP estimate. CNBC: “Economic growth is expected to continue at a rapid pace in the third quarter, according to a preliminary forecast from the Atlanta Fed. The central bank district estimates that GDP will increase 5 percent for the July-to-September period, according to an update posted Wednesday. If the forecast is accurate, it will come on top of a strong 4.1 percent second quarter that was buoyed by a jump in consumer and business spending. [Trump] boasted Friday that growth would go ‘a lot higher’ even though many economists, including at the Fed, expect the economy to moderate in 2019 and beyond. The Atlanta Fed’s GDP Now forecast, however, has its skeptics. The tracker often starts off optimistic early in the quarter then cools as more data flow in. In the first quarter, the indicator at one point showed 5.4 percent growth in a quarter where GDP rose just 2.2 percent.”

— Treasury runs up more red ink. The Wall Street Journal’s Josh Zumbrun and Daniel Kruger: “Looming trillion-dollar federal budget deficits are boosting the U.S. Treasury’s borrowing and could restrain a fast-growing economy as the cost of credit also rises. On a day the yield of the 10-year Treasury note climbed above 3% for the first time since June, the Treasury Department announced Wednesday it would boost auctions of U.S. debt by an additional $30 billion over the next three months, in part by adding an additional $1 billion each month to its auctions of two-year, three-year and five-year notes. Over the remainder of the year, the Treasury plans to borrow $329 billion from July through September — up $56 billion from the agency’s April estimate — and $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year.”

— ADP: 219,000 hires in July. Bloomberg News’s Sho Chandra: “Companies added the most workers in five months to U.S. payrolls in July, a sign hiring remains strong despite a shrinking pool of qualified workers and headwinds from trade, according to data released Wednesday from the ADP Research Institute in Roseland, New Jersey. … The results, coming ahead of the monthly jobs report due from the Labor Department on Friday, are a positive sign for private payrolls. Demand for labor increased across a range of industries including professional and business services, health care and social assistance, leisure and hospitality, manufacturing and construction, the ADP report showed.”

TRUMP TRACKER

TRADE FLY-AROUND:

President Trump speaks at a rally in Tampa on July 31. (Zack Wittman/Bloomberg News)

— Trump eyes major escalation with China. The Post’s Damian Paletta: “Trump has instructed his top trade representative to consider imposing a 25 percent tariff on $200 billion in Chinese imports, a much stiffer penalty than previously proposed, senior administration officials said Wednesday. The penalty would apply to a broad range of products, including refrigerators, bedsheets, clothing, furniture and toilet paper. Business groups have warned that such a steep tariff could drive up prices for millions of consumers and a number of them panned the White House announcement Wednesday… But White House officials said the potentially steep tariff was necessary to counter what they allege is the Chinese government’s decision to forcefully retaliate against a range of trade restrictions Trump has already imposed.”

Here was Commerce Secretary Wilbur Ross, in a Wednesday appearance on Fox Business Network: “We really have to do it…  The president ultimately wants less tariffs, less non-tariff trade barriers, level playing field, low subsidies, the whole nine years. But to get there, we have to make it more painful for them to continue these bad practices.”

China restates threat to strike back. The reaction from China’s Ministry of Commerce, per Bloomberg. “China has made full preparation for the U.S. threats to escalate the trade war and will have to retaliate to defend national pride and the people’s interests.”

Markets in Asia are swooning. More from Bloomberg: “A fresh round of trade-war fears sent stock markets sinking across Asia. Investors had nowhere to hide, with equity gauges from Japan to India plunging on Thursday. The MSCI Asia Pacific Index dropped as much as 1.4 percent, heading for its biggest slide in six weeks as more than $220 billion in equity-market value evaporated… The measure has lost 2.1 percent from a high less than a week ago.”

— Congress tightens screws on Chinese investment. NYT’s Alexandra Yoon-Hendricks: “Chinese investment in the United States is about to get a bit harder. Legislation expanding the powers of a federal body that reviews foreign investments in the United States for national security threats passed the Senate 87-10 on Wednesday as part of a $717 billion defense policy bill, and it is now headed to [Trump] for his signature. The bill… broadens the jurisdiction of the Committee on Foreign Investment in the United States, or Cfius… Cfius’s expanded jurisdiction will give it a say in deals beyond mergers and acquisitions. Under the bill, joint ventures, minority stakes, and real estate transactions near military bases or other sensitive national security facilities all could be investigated — and potentially squashed — by Cfius.”

— NAFTA talks progress. Reuters’s Joseph White: “The United States and Mexico are getting close to a deal on the key issue of auto content rules at talks to renew the NAFTA trade pact, Mexican and Canadian officials said Wednesday. Guillermo Malpica, head of the trade and NAFTA office for the Mexican government, also said the United States had ‘started showing more flexibility last week’ on autos’ content and other topics at the negotiations, which have dragged on for almost a year. Canadian trade negotiator Colin Bird told an auto industry conference in Michigan on Wednesday that NAFTA negotiators are making progress on auto content rules, and endorsed the concept of linking those rules to improving workers’ wages.”

— Steel magnate praises tariffs. The New York Times’s Stanley Reed: “Lakshmi N. Mittal, the chairman and chief executive of ArcelorMittal, the world’s biggest steelmaker, is the rare business leader who applauds [Trump’s] protectionist approach to trade. For Mr. Mittal, the White House’s tariffs on steel imported into the United States have driven up prices, which, along with strong global demand, have delivered his company’s best results since 2011. On Wednesday, ArcelorMittal said profit rose to $1.9 billion in the second quarter, a 41 percent increase from the same period a year earlier, on sales of $20 billion. … ‘The industry has quite changed,’ Mr. Mittal said in an interview after ArcelorMittal reported its results. ‘Trade actions in various countries have really helped in structurally changing the landscape of the steel industry.’ ”

— Trade war threatens a delicacy. The Post’s Danielle Paquette: “The cost of pig feet was climbing, and Xu Min wondered: Had the trade war reached her market stall? The 29-year-old mother of two sells every part of the hog in a town known for braised hoofs, a classic snack here called trotters. She carves the meat for local vendors, who slather the feet in soy sauce and hawk them along a nearby canal for as little as 15 yuan, or about $2. Geopolitical sparring does not come up often at this market of fresh cuts, watermelon crates and crabs wriggling in plastic bags, Xu said, but lately she and other merchants have swapped grim predictions about the commercial fight between the United States and China. ‘Importing less American pork will bring up the prices,’ the butcher said, frowning behind her bloodstained counter. ‘Fewer people will be buying — a bad effect.’”

MELTDOWN WATCH:

POCKET CHANGE

Tesla chief executive Elon Musk in Chicago on June 14. (Kiichiro Sato/AP)

— Tesla posts big loss. The Post’s Drew Harwell: “Tesla said Wednesday that it had burned less cash than expected during the second quarter and was nearing profitability, a long-doubted goal for the beleaguered automaker racing to boost production of its all-electric cars. The automaker said that it had made $4 billion in car, battery and leasing revenue during the second quarter of the year, a sharp increase over the same quarter last year because it had finally introduced its newest Model 3 sedan. The stock climbed about 4 percent in after-hours trading. Tesla’s second-quarter losses of $743 million were lower than analysts’ estimates, of about $900 million. But its cash burn extended a money-losing streak for chief executive Elon Musk during one of the company’s most challenging years in history.”

The Google logo at the company’s headquarters in Mountain View, Calif., on July 19. (Marcio Jose Sanchez/AP)

— Google wants to return to China. The New York Times’s Li Yuan and Daisuke Wakabayashi: “Google withdrew from China eight years ago to protest the country’s censorship and online hacking. Now the internet giant is working on a censored search engine for China that will filter websites and search terms that are blacklisted by the Chinese government … Google has teams of engineers working on a search app that restricts content banned by Beijing … The company has demonstrated the service to Chinese government officials … Yet the existence of the project does not mean that Google’s return to China is imminent … Google often builds and tests different services that never become publicly available.”

— Icahn vs. Cigna. WSJ’s Cara Lombardo and Dana Mattioli: “Activist investor Carl Icahn has built a sizable stake in Cigna Corp. and plans to vote against the health insurer’s $54 billion purchase of Express Scripts Holding Co., the latest sign of trouble for the planned tie-up. Mr. Icahn, whose stake amounts to less than 5% of Cigna’s shares outstanding, believes the company is paying too high a price for the pharmacy-benefit manager, which faces threats on a number of fronts, according to people familiar with the matter. Cigna in March agreed to pay what amounted to about $96.03 a share in cash and stock for Express Scripts. In a sign of shareholder fear that the deal won’t go through, Express Scripts stock was already trading well below the offer price and fell further after The Wall Street Journal reported on Mr. Icahn’s stance.”

— Wall Street’s new “Weinstein clause.” Bloomberg’s Nabila Ahmed: “Advisers are adding guarantees to certain merger agreements in light of the sexual misconduct scandals that have enveloped the producer Harvey Weinstein and other high-profile businessmen — ones that legally vouch for the behavior of a company’s leadership. The development is a concrete example of how business is trying to adapt to the #MeToo era, at least in terms of legal liability. The move is particularly noteworthy given its source: the male-dominated world of M&A advisory where the terms of an offer can make or break a bid. In some cases, buyers have even negotiated the right to claw back some of the money they paid if subsequent revelations of inappropriate behavior damage the business.”

MONEY ON THE HILL

Senate Majority Leader Mitch McConnell (R-Ky.). (AP Photo/Jacquelyn Martin)

— Senate approves spending bills. Politico’s Jennifer Scholtes and Kaitlyn Burton: “Senators passed a four-bill spending package Wednesday, forging ahead in the federal funding process even as the president threatens to wreck it all with a veto-spurred government shutdown tied to border security. In a 92-6 vote, the Republican-led Senate signed off on a bundle that includes one quarter of the 12 annual spending bills covering a host of federal agencies. Passed was fiscal 2019 funding for the departments of Agriculture, Transportation, Interior, Treasury and HUD, as well as the EPA and IRS. After canceling all but one week of August recess, Senate Majority Leader Mitch McConnell announced this week that leaders on both sides of the aisle aim to pass two more of the spending bills — Defense, and Labor-HHS-Education — by month’s end.”

— Democrats are outraising Republicans. Bloomberg’s Josh Green: Democrats have “caught a green wave of cash—the torrent of money pouring into Democratic campaign coffers helped 73 House candidates outraise Republican incumbents and opponents in races for open seats in the second quarter, a Bloomberg analysis of Federal Election Commission data shows… In the second quarter of this year, non-incumbent Democratic House candidates raised more than three times the amount they did in the same period in 2014. That works out to an average of $151,000 per candidate, compared with $101,000 in 2014.”

Even as Dems struggle with whether to accept corporate cash. AP’s Lisa Lerer reports that “money in politics is emerging as a new litmus test for Democratic candidates. In ads, stump speeches and debates, scores of politicians are pledging to reject corporate PAC donations. Their ranks include a handful of Democrats, including Harris, who are widely rumored to be exploring presidential bids: New Jersey Sen. Cory Booker, New York Sen. Kirsten Gillibrand and Massachusetts Sen. Elizabeth Warren. Joining them is Vermont’s independent senator, Bernie Sanders. In total, more than federal 170 candidates have said they’re not accepting corporate PAC donations.”

— Muzinich advances. The Hill’s Naomi Jagoda: “The Senate Finance Committee on Wednesday approved [Trump’s] nominee to be deputy Treasury secretary, but the top Democrat on the panel announced plans to put a hold on floor debate about the pick. The Finance Committee advanced Justin Muzinich’s nomination to be deputy Treasury secretary by a party-line vote of 14-13… But Finance Committee ranking Democrat Ron Wyden (Ore.) complained during the hearing that it was ‘a struggle to get straight answers to questions that ought to have been low-hanging fruit.’ Wyden cited as an example his question to Muzinich about whether Treasury had a role in preventing foreign governments from interfering in U.S. elections. Wyden also criticized Muzinich for saying that the new tax law will pay for itself — a claim that economists across the ideological spectrum refute.”

— GM taps former Trump aide. Reuters’s David Shepardson: “General Motors Co said on Wednesday it has tapped a former Trump administration economic and trade adviser to head its public policy efforts. The largest U.S. automaker said it hired Everett Eissenstat, who was until recently a senior White House aide on economic and trade issues, as its new senior vice president for global public policy. The 55-year-old Oklahoma native will report to Chief Executive Mary Barra.”

THE REGULATORS

— Wells to pay $2.09 billion fine. WSJ’s Emily Glazer: “Wells Fargo & Co. agreed to pay $2.09 billion to settle with the Justice Department over the sale of toxic mortgage-backed securities in the lead-up to the financial crisis. The Justice Department said Wednesday it reached a civil settlement with Wells Fargo to end the long-running probe into the matter. Wells Fargo had already set aside funds to cover the settlement, in which it didn’t admit liability. The bank and the Justice Department had negotiated for several months over the amount, which at one point ranged between $2.5 billion and $3 billion, people familiar with the negotiations said. Wells Fargo Chief Executive Timothy Sloan said in a statement the bank is ‘pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago.’”

DAYBOOK

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