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Trade Offs PUBLIC ACCESS

Even if they don’t Escalate into a Global Trade War, New Tariffs are Impacting Engineering and Manufacturing.

[+] Author Notes

Agam Shah is associate editor at Mechanical Engineering magazine.

Mechanical Engineering 140(11), 28-33 (Nov 01, 2018) (6 pages) Paper No: ME-18-NOV1; doi: 10.1115/1.2018-NOV-1

Many economists predict that a combination of higher tariffs and political uncertainty could negatively impact industrial machinery, robotics, automotive, and other industries. A full-scale trade war could create as many losers as winners, even among engineers. Some experts believe a trade war could spur companies to implement technology such as artificial intelligence, automation, and the latest designs in a bid to cut manufacturing costs, and to seek out business opportunities in markets like aerospace. This article delves into how the industry is bracing for the impact of tariffs.

Drew Rosenblatt keeps an eye on the price of steel. That makes sense, since Rosenblatt is the CEO of Marlin Steel Wire Products, and as the name implies, the company uses a lot of steel. Earlier this year, Rosenblatt was one of countless manufacturers who saw the price of raw materials rise—a result of a 25 percent tariff on steel and 10 percent tariff on aluminum imported from most countries.

Rather than panic, Rosenblatt sees the materials cost as a new challenge for his company.

“Our mechanical engineers have to come up with elegant designs that in a perfect world use less steel and can be made faster,” said Rosenblatt, adding “we have to buy cost savings elsewhere.”

Steel and aluminum were not the only imported commodities or goods subject to higher tariffs. In 2018, the U.S. government ripped up long-held trade agreements and volleyed stiff tariffs on China and other countries on intermediate and end products. Many U.S. tariffs aimed at China revolve around machinery, computers, telecommunications, and electrical equipment, which made up 54 percent of the imports from China in 2017, up from 33 percent in 1997, according to Peterson Institute for International Economics.

Beyond renegotiating trade deals, the Trump administration hopes higher tariffs can make the U.S. self-sufficient, save threatened industries, protect intellectual property, and promote products “Made in the U.S.A.” Rosenblatt placed a high value on Marlin’s patents and stressed the importance of new trade deals protecting intellectual property—a component lacking in many existing trade deals—for an edge over global competitors.

Danger or opportunity? Drew Rosenblatt of Marlin Steel sees tariffs on steel imports as a chance to innovate.

Image: Marlin Steel

Grahic Jump LocationDanger or opportunity? Drew Rosenblatt of Marlin Steel sees tariffs on steel imports as a chance to innovate.Image: Marlin Steel

“If we’re not constantly innovating, it’s hard for us to differentiate ourselves from the low-labor, low-quality competition. That’s the critical difference moving forward,” Rosenblatt said.

While Rosenblatt is optimistic, many economists predict that a combination of higher tariffs and political uncertainty could negatively impact industrial machinery, robotics, automotive, and other industries. A full-scale trade war could create as many losers as winners, even among engineers. Tariffs are imposed indirectly on engineering-reliant companies, which create value in the United States through their designs, but then source parts across a globalized supply chain and often rely on Chinese factories for low-cost assembly. Technological development in the U.S. may advance in automotive technologies, for example, but tariffs bring additional cost and delay commercializing those ideas.

While steel makers celebrate tariffs, the import taxes will raise metal costs for manufacturers.

Image: Marlin Steel, The Baltimore Sun

Grahic Jump LocationWhile steel makers celebrate tariffs, the import taxes will raise metal costs for manufacturers.Image: Marlin Steel, The Baltimore Sun

For Marlin, a trade war could spur the company to implement technology such as artificial intelligence, automation, and the latest designs in a bid to cut manufacturing costs, and to seek out business opportunities in markets like aerospace.

The alternative is not pretty. “Companies that don’t get with the program will be extinct,” Rosenblatt said.

Tariffs are taxes paid by importers of goods and commodities. The idea is that by making it more expensive to bring products across the border, higher prices will encourage domestic production of those products, leading to an increase in both manufacturing jobs and investment in factories and equipment. The downside is higher prices for consumers, since the price of domestically produced goods will usually rise to meet that of the imports plus tariffs.

That dynamic led to conflicts over trade policy for much of American history, with urban manufacturers favoring high tariffs and farmers and rural consumers agitating for lower ones. Tariffs are not just a historical artifact, though. Import restrictions have remained part of the U.S. policy tool kit. But economists today tend to view tariffs as a poor tool even for supporting domestic producers.

President George W. Bush imposed tariffs on steel products in 2002, for instance, as he wanted to save the struggling U.S. steel industry, which was competing against imports from China. “It was a disaster. He ended up having to reverse the tariffs in 18 months. Thousands of jobs were lost as a result,” said Mary Anne Madeira, assistant professor of international relations at Lehigh University in Bethlehem, Pa.

And President Barack Obama’s 2009 tariffs on tires—to similarly address competition from China—lasted three years. The U.S. tire industry was saved as production went up, but tire prices ballooned because stores were offering more expensive American-made tires in the place of lower-cost Chinese tires.

“Consumers bought fewer tires, so tire retailers were hit really hard. It was a net job loss. Jobs were saved in the tire manufacturing industry, but way more jobs were lost in tire retail,” Madeira said.

In fact, the infamous Smoot-Hawley Act, which in 1930 imposed tariffs on imported farm and manufactured goods and which have for decades been implicated in deepening the Great Depression, made a bit more economic sense than do any recent trade restrictions. After all, in the early 20th Century trade was simpler and manufactured goods produced entirely abroad by a foreign-owned firm arrived in a boat and went straight to American stores. Such products competed directly with American-made consumer goods.

In the 21st Century, much of global trade is in intermediate goods, where components from several countries are assembled and then that finished product is exported back.

“The goods that are reaching our shores from China to a great extent are produced by American firms,” Madeira said. “That’s why it’s so much more complicated and tariffs are so much worse now. Tariffs are not hurting primarily a Chinese firm, they are hurting American and international firms.”

Others recognize the risk, but also see the opportunity for better trade terms to result from the threat of a trade war.

“Manufacturers certainly have concerns that tariffs will cause more problems than they solve,” said Jay Timmons, CEO of the National Association of Manufacturing, an advocacy group, “but we also recognize that the administration may intend to use them as a negotiating tactic to bring China to the table and achieve larger goals.”

U.S. steelmakers are also cheering the tariffs, with companies like Nucor recording soaring profits. US Steel said it would reopen plants in the U.S. and add hundreds of jobs. Barbara Smith, CEO of steel maker CMC, said the tariffs will boost local demand and production, and “assist in creating a fair and level playing field.”

In a curtailed supply chain, research firm IHS Markit is recommending buyers beat tariffs by adopting a localized steel purchase strategy.

But smaller U.S. manufacturers using steel in production are feeling the brunt, most notably, iconic motorcycle company Harley Davidson, which moved some production outside the U.S. to Thailand to address growing demand for its bikes in European markets. Other manufacturers have had to cut jobs because of the increased cost of acquiring steel and aluminum.

Because there are more companies in the U.S. that use steel in manufacturing products than produce steel itself, it’s expected that continued tariffs will result in a net loss of jobs across the economy. The number of lost jobs is disputed, however. A study by the Economic Policy Institute, a labor-friendly think tank, pegged total job losses to around 146,000, while a June report from the Trade Partnership, which represents importers, suggested the true number could be as high as 400,000 net lost jobs. For every job created in the metals industry, the Trade Partnership found, 16 would be lost in the rest of the economy due to higher prices.

The auto industry may be hard hit by the steel tariffs and other trade measures. In addition to more expensive steel, car prices could also increase because of tariffs on semiconductors. Cars make up about 10 percent of the total chip supply chain, according to semiconductor industry association SEMI.

The U.S. government also is pondering tariffs on imported cars to increase American automotive competitiveness. The U.S. Department of Commerce says tariffs are necessary as imported cars accounted for 48 percent of passenger cars sold in 2017, up from 32 percent 20 years ago. U.S. employment in motor vehicle production also declined by 22 percent over the last 20 years, despite cars being bought at record levels.

Industry observers worry that tariffs will drive up automobile prices while stifling much-needed innovation.

Image: General Motors

Grahic Jump LocationIndustry observers worry that tariffs will drive up automobile prices while stifling much-needed innovation.Image: General Motors

According to a study by the Center for Automotive Research, which is based in Ann Arbor, Mich., prices of new vehicles could rise from between $455 to $6,875 depending the type of tariff, where the vehicle was assembled, and any nation-based import quotas that are imposed.

Those higher prices would lead to fewer sales and likely job losses. Between 28,800 and 117,500 auto industry jobs could be lost, CAR found.

New trade measures also could stall technological progress in the auto industry. The industry is moving toward electrification, and every major manufacturer is redesigning cars. With tariffs increasing the price of importing parts such as certain types of electric vehicle motors, leadership in hybrid and electric vehicles could be permanently ceded to manufacturers in Europe and Japan.

“We are afraid that tariffs will strike at the heart of American technological leadership by chilling R&D investments in emerging innovations,” said the Auto Alliance, an American car industry advocacy group, in an official statement. “Today, the U.S. is a leader in the global race to develop automation and electrification. If auto tariffs raise costs and stall investments, the U.S. may well lose that leadership, since other countries are already chasing automakers to build R&D facilities overseas.”

Other manufacturers are waiting to see what the potential impacts will be. Gas turbines, for instance, are very large machines made mostly of steel alloys, some of which are imported from China, and the U.S.-based makers of these turbines—either for electric power or commercial aircraft— potentially could feel the impact of tariffs, said Timothy Lieuwen, executive director for the Strategic Energy Institute at the Georgia Institute of Technology in Atlanta.

GE, a leading manufacturer of gas turbines, said the aviation parts it imports from China had about 50 percent U.S. content by value. “Putting tariffs on parts from China with high U.S. content would hurt both the U.S. companies that make those initial components, as well as those GE plants and workers who turn the imported parts into final products in the U.S.,” said Karan Bhatia, GE’s president of government affairs and policy in testimony delivered to the U.S. Trade Representative. The company has assessed a $300 million to $400 million impact.

Intel is moving semiconductor production from the U.S. to countries not hurt by tariffs.

Photo: Intel Corporation

Grahic Jump LocationIntel is moving semiconductor production from the U.S. to countries not hurt by tariffs.Photo: Intel Corporation

For companies like GE, a couple of hundred million extra in manufacturing costs is a drop in the bucket and won’t have a large impact, Lieuwen said. The real concern, however, is in retaliatory trade restrictions, since a lot of the potential customers for jet engines and gas turbine power plants are outside the U.S., particularly in the emerging markets of Asia.

For makers of large, high-tech machines such as gas turbines, increased costs from steel tariffs won’t have a big impact. Retaliatory actions might.

Photo: Siemens

Grahic Jump LocationFor makers of large, high-tech machines such as gas turbines, increased costs from steel tariffs won’t have a big impact. Retaliatory actions might.Photo: Siemens

“There certainly has to be a concern about tariffs in Asian markets around aviation and power,” Lieuwen said.

Some retaliatory tariffs have been proposed already. China has threatened to add a 25 percent tariff to Boeing planes, which the plane maker is still assessing. Such measures could have a ripple effect throughout the aviation supply chain.

Other parts of the energy industry are already facing pressure from U.S. imposed tariffs. The Trump administration has imposed tariffs of up to 30 percent on photovoltaic power cells from China for the next four years, for instance, and this is already affecting installers and potential users of solar power. “Most of the affordable solar cells in installations are imported from China, and tariffs will have a clear and direct impact on those costs,” Lieuwen said.

On average, home solar installations cost around $15,000, with payback in up to nine years, according to the Environmental and Energy Study Institute, a Washington-based non-profit. The tariff will add to the cost, adding one year to the pay back.

Solar cell installations worth billions of dollars have already been cancelled or moved back. The Environmental and Energy Study Institute expects the higher photovoltaic cell costs will lead to an 11 percent reduction in overall solar power installations, resulting in 23,000 lost jobs.

“To the extent at which it can prop up or revive a domestic photovoltaic manufacturing capability, that is yet to be seen,” Lieuwen said.

Ingenuity could help mitigate some risks associated with higher costs tied to engineering products, said Eben Upton, who created the $35 Raspberry Pi computer that is used in robots, drones, and industrial equipment.

Upton has steadfastly held on to a $35 price tag for the Raspberry Pi, which covers the bill of materials, manufacturing, and the software stack. Advances in technology, better components, and an improved Linux-based software stack helped add functionality, making the kit useful for robots, drones, and industrial equipment. The fixed-price focus reduced the strain on materials and shipping, so that most of the manufacturing of the Raspberry Pi can be done in the United Kingdom rather than China.

“For the few accessories we have manufactured in China, we also have U.K. manufacturing capability,” said Mike Buffham, director of product management at Raspberry Pi. “The plan is for the U.S. to be served in future from U.K. manufactured product therefore mitigating the impact of tariffs on Chinese manufactured goods.”

According to Morris Cohen, professor of manufacturing and logistics at Wharton School at the University of Pennsylvania in Philadelphia, the scrambling of the global supply chain resulting from a trade war could, inadvertently, lead to accelerated adoption of new industrial technology, often referred to as Industry 4.0. That might not lead to more jobs—manufacturing employment today is 7 million below the peak of 19.7 million workers in 1979—but could improve the quality of products across the board.

“We’re producing more with fewer people,” Cohen said. “The classic case in point is the agricultural industry. In 1900, sixty percent of all the workers worked in farms. Today it is like two to three percent. Yet, the amount and quality of the food we produce is far better than in 1900.”

Whether higher tariffs wind up being a net positive or negative depends on what additional actions are taken as a result. “If the threat of imposing tariffs leads to renegotiation of NAFTA, or the elimination of tariffs, which it might do between the European Union and the U.S., then you can argue that the end result is good,” Cohen said.

If new trade deals can’t be negotiated, then this year’s new tariffs will be the opening act of a new era of deglobalized trade. The ultimate result may not be more manufacturing jobs in the U.S., but instead more automation and a greater reliance on new technologies such as artificial intelligence. In that case, blue-collar factory workers may not prosper from a global trade war. The big winners could very well be the college-educated engineers and software developers who have thrived during the era of globalized trade.

Copyright © 2018 by ASME
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