Backfire Economics: The U.S. Nail Business Gets Hammered By Trump's Steel Tariffs

|
Includes: BDD, BOM, BOS, DBB, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JJM, JJUB, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RJZ, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SLX, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UBM, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Mark J. Perry

From Wednesday's Wall Street Journal op-ed by Chris Pratt, operations general manager of Mid Continent Nail Corporation's now-idled Poplar Bluff, Missouri plant ("When the Only Tool You Have Is a Tariff"):

I work for the largest nail manufacturer in the U.S. Our company has fought hard to survive in the face of unfair Asian competition. We've doubled our workforce in the past five years. But now we are on the brink of extinction, and our government's trade policy is to blame.

A few years ago, our company created an entirely new plant in Poplar Bluff, Mo., to make specialized nails that are connected with paper tape. These are the most difficult nails to produce. After more than a year of investment and training, we began production. Our paper-tape nails became the best in their class. We trounced our foreign competitors.

Now, however, our paper-tape plant is idle. On June 1, the U.S. imposed Section 232 duties of 25% on certain kinds of steel, including the wire we use to make nails [see top chart above, industrial supplies like wire are 22.6% of US imports]. Our costs shot up overnight, and it became impossible to sell nails competitively. Orders dropped 70% in two weeks, and our workforce shrank from 500 employees to 370.

Meanwhile, our competitors from such countries as China, Taiwan, Oman, India and Turkey pay no tariff on their finished nails. They can make their nails at home-using low-priced, globally sourced wire-and ship the finished product to the U.S. with an enormous price advantage. They make vast profits while our own nail manufacturers are fighting to stay afloat.

MP: A few economic lessons here that the Mercantilist-in-Chief and his Rasputins haven't learned yet:

1. Most (nearly 60%) of U.S. imports are direct inputs purchased by US firms for production and assembly in the U.S. using American workers, like the steel wire used by Mid Continent Nail to manufacture nail in the U.S. And even the finished imported consumer goods like clothing, footwear, tools, appliances, food products, furniture, computers, and TVs aren't purchased directly by American consumers, but as "indirect inputs" by U.S. retailers like Home Depot (NYSE:HD), Target (NYSE:TGT), Costco (NASDAQ:COST), Walmart (NYSE:WMT), Best Buy (NYSE:BBY) and U.S. auto dealers that employ millions of American workers. Therefore, a tariff tax on imports is a tariff tax on direct inputs used by American firms like Mid Continent Nail, which raises their costs of operation and makes them less competitive in a hyper-competitive global marketplace.

Exhibit A: Mid Continent Nail Corporation, now idled by the Trump tariffs on imported steel, and on the brink of extinction.

2. A tax on imports is equivalent to a tax on exports, and exports and imports are unmistakably inextricably correlated, an important point I featured on a CD post last year using material from Dartmouth College economist Douglas A. Irwin's 1996 excellent pamphlet Three Simple Principles of Trade Policy. Here's Doug Irwin:

A tax on imports is equivalent to a tax on exports. Any restraint on imports also acts, in effect, as a restraint on exports. The converse of this proposition is also true: when a government undertakes policies to expand the volume of exports, it cannot help but to expand the volume of imports as well.

Exports and imports are unmistakably correlated: they rise and fall in lockstep, such that one cannot distinguish between them (see bottom chart above for graphical confirmation of that phenomenon over more than 200 years in the U.S.).

If a government undertakes policies that systematically reduce the volume of imports [e.g., through trade policies like the current Trump tariffs], it also systematically reduces the volume of exports. The reasons may be indirect and less than obvious, but they are still present and have to be reckoned with.

In other words, protectionist trade policies like the Trump tariffs that restrict, limit or ban imports in an attempt to expand domestic production and employment by increasing exports are guaranteed to fail and backfire.