The end of the 90-day trade truce between China and the U.S., which paused a tariff increase on $200 billion in Chinese imports and $34 billion in retaliatory tariffs by China on U.S. exports, coincided with the Chinese New Year on February 5, when China essentially shuts down for a week-long celebration. As a result, in the weeks before the Chinese New Year, West Coast ports were busier than ever, according to Stephen Cheung, president of the Los Angeles World Trade Center.
“There [was] a rush to move parts, components and raw materials manufacturers need before the Chinese New Year, because people [feared] getting stuck with a 25 percent tariff when the trade truce [ended] and [they were] rushing orders through,” he says.
The increase in import and export traffic had longshoremen working overtime, but it also put additional pressure on already stressed port-related warehouse and logistics labor. When the higher tariffs kick in, it is anyone’s guess what will happen to that labor market. (Previously President Trump had imposed a 10 percent tariff on imports, but in September increased the level to 25 percent.) About 350,000 manufacturing jobs in the Los Angeles region, as well as thousands of manufacturing jobs across the Western U.S., depend on parts, components or raw materials from Asia. Cheung also worries about the trade war’s impact on 580,000 Los Angeles-area jobs that rely on trade and logistics.
The tariff increase added a sense of urgency for some U.S. manufacturers to move production of parts or components from China to Mexico. But this is making it difficult for other U.S. manufacturers to compete. EBW Electronics, a Michigan-based company that relies on components produced in China to manufacture automobile lights, is among those trying to pass the higher tariffs on to customers, while struggling to compete with firms that moved component production to Mexico, according to a New York Times article. EBW’s chairman, who voted for Trump and now says he feels betrayed, told the newspaper the higher tariffs will cost his company half of its profits.
However, the future of trade with Mexico is currently as uncertain as it is with China, according to Cheung. The U.S. Congress took so long to ratify the proposed replacement for the North America Free Trade Agreement, the U.S.-Mexico-Canada Agreement (USMCA), that Mexico elected a new president in the meantime, he notes. Mexican President López Obrador has very different views than his predecessor and will likely want to make changes before the USMCA is implemented, Cheung says. This means the agreement will also have to go back to Canada for review and then to Congress for final ratification. And judging by recent talks between Democrats and Republicans, Cheung suggests that the USMCA is unlikely to see the light of day for quite a while.
The USMCA deal aims to eliminate wage competition with U.S. workers. It limits the number of cars manufactured in Mexico to be sold in the U.S., reduces the maximum level of core components made in Mexico and used in U.S. products from 65 percent to 75 percent, and requires a $16 minimum hourly wage be paid to Mexican workers who are making certain products for sale in America.
While the trade truce gave importers and exporters some breathing room, most trade experts contend it is unrealistic to think a better deal with China can be easily negotiated. However, Walter Kemmsies, an economist and chief strategist in the ports, airports and global infrastructure group of real estate services firm JLL, notes that China’s economy is slowly becoming less dependent on trade, with a growing Chinese middle class that is already larger than the U.S. population.
“With workers getting higher value-add jobs, consumers are increasingly able to buy more of what’s being produced there and are selling the excess abroad,” Kemmsies says. “So, there is no reason for U.S. manufacturers to repatriate their manufacturing operations to start making products here to sell in China.”
Companies that went offshore did it to increase their profits by tapping into Asian consumer markets, Kemmsies says, emphasizing that the intent was not just to manufacture goods in China for export to the U.S., as many Americans believe. The populations of China and India alone total more than 2.7 billion compared to the U.S. population of 300 million. “Their growing middle classes are a significant profit opportunity if the cost is low enough,” Kemmsies adds. “For many goods that means manufacturing in the foreign local market.”
Industrial goods, including heavy machinery and chemicals, and agricultural products are two export areas the U.S. is focused on to reduce the trade deficit. “It’s hard to beat U.S. agricultural production, as with today’s technology and scientific knowhow, one farmer can farm thousands of acres single-handedly.”
“It’s similar for the petrochemical industry,” Kemmsies notes. “U.S. production is very abundant, allowing for exporting natural gas and use as feedstock for petrochemicals to make plastic products—ports are struggling to find enough containers to export them in. As we normalize trade relations, the net effects could be more U.S. employment.”
President Trump believes China will buckle under U.S. pressure to balance the trade deficit because its economy is slowing, according to the New York Times. In Cheung’s view, however, China will take a stern stance if the full 25 percent tariff becomes effective permanently. “China does need us, but [the trade war] will hurt us too,” he says. “When you corner people, they will find a way out,” Cheung adds, noting that the Made in China 2025 initiative, for example, aims to boost the Chinese economy by expanding government subsidies to businesses. “The question is: What is our plan?”
“I think this is just the beginning,” Cheung adds. A trade war “will trigger a cyclical effect that drives our economy down—not just in Los Angles, but the entire country. About half of products moving through our ports [Los Angeles and Long Beach] goes to points east. Consumers [in those markets] will suffer from suppression of products coming through ports with higher prices and reduced jobs.”