Trump's global trade war expected to inflict economic casualties in Wisconsin and across nation

John Schmid | Milwaukee Journal Sentinel

American Sewer Parts and Cleaning Inc. buys aluminum and steel that its metalworkers cast and weld into pumps, pipes and parts, which are sold and shipped around the world.

That’s been its business model for decades.

In the last few weeks, however, the 41-person machine shop finds itself a pawn in a global trade war being waged in government offices in Washington, Beijing, Ottawa, Mexico City and other capitals.

U.S. business groups say hundreds of thousands of American jobs are at stake as newly imposed trade barriers cause an abrupt slowdown of cross-border trade.

The fallout is felt acutely in places like Menomonee Falls, the Milwaukee suburb that American Sewer calls home. On June 1, President Donald Trump imposed a 25 percent tariff on foreign steel and a 10 percent tariff on foreign aluminum — triggering rounds of retaliatory tariffs on made-in-America goods.

Hoping to guarantee a future inventory of raw materials, Pete Utecht, American Sewer’s founder and owner, aggressively began to stockpile aluminum and steel. He acquired domestic metals whenever possible, but that's not always workable, particularly because most aluminum is produced abroad.

All the while, Utecht watched as metal costs surged 20 to 30 percent amid newfound turmoil in global metals markets. Then, even as costs were surging, sales began to fall. Foreign customers, fearful that new rounds of retaliation could hit by the time parts and equipment are shipped, began to hold off on ordering Utecht's parts and equipment.

"Our sales already are falling because no one is certain about where this will go," Utecht said.

With uncertainty surrounding raw material costs, selling prices and foreign demand, strategic planning becomes impossible. And that means the outlook for his privately held company and others is shrouded in the same uncertainty.

"The tariffs have potential to put small shops out of business," Utecht said.

AP explains tariffs as Trump weighs trade policy President Donald Trump is turning to an old fashioned weapon to try to get more products made in America: Tariffs. What are they? (April 4)

‘A big disconnect’

Trump, who argues that the measures are necessary under his plan to protect American jobs, hasn't limited protectionist tariffs to foreign metals.

The Trump administration has imposed multiple rounds of tariffs this year, targeting all the world's biggest trading blocs and economies, including: all of North America from Mexico to Canada; the 28-nation European Union; and China, Japan and India.

The scope and abruptness of Trump's trade barriers are unprecedented in the global age.

“There’s a big disconnect between how the president sees the world and how modern manufacturing actually works,” said Philip Levy, who served as senior foreign trade adviser to President George W. Bush and now is a senior fellow on the global economy at the Chicago Council on Global Affairs.

Trump has imposed tariffs on Canadian lumber and paper, raising the cost of newsprint for American newspapers. Earlier this year, Trump approved tariffs on foreign solar panels and washing machines.

He's been particularly aggressive on imports from China. On Friday, in a renewed shake-up of the global balance of trade, Trump imposed a new round of tariffs on $34 billion worth of Chinese products.

That decision prompted quick retaliation from Beijing, which immediately announced its own round of similarly sized tariffs on American goods.

“In order to defend the core interests of the country and the interests of the people, we are forced to retaliate,” the Chinese Commerce Ministry said.

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The Trump administration is showing no indication that it's ready to back down. It's weighing tariffs on imported automobiles and parts, as well as additional rounds of Chinese trade barriers, even as pro-business interests in the U.S. increasingly say the actions could hurt the U.S. economy.

In the first year of Trump's administration, many investors and analysts dismissed Trump's anti-trade rhetoric as political populism, meant to appeal to the belief that lost American jobs will spring back into existence if the U.S. erects border walls and trade barriers.

By last week, analysts and pro-business trade groups said they expect the opposite will happen.

“Tariffs are beginning to take a toll on American businesses, workers, farmers and consumers as overseas markets close to American-made products and prices increase here at home," said Tom Donohue, president and chief executive of the U.S. Chamber of Commerce, the nation’s premier business lobby and traditional ally of Trump’s Republican Party.

Targeted retaliation

It's not an accident that Wisconsin is caught in the middle of the international crossfire, according to Sean Hackbarth, an analyst at the U.S. Chamber who is a Wisconsin native.

Rival nations, in their retaliation, chose Wisconsin — which voted for Trump — as a political pressure point, he said. "China, the E.U., Mexico and Canada were savvy by strategically targeting important industries" in the two home states of the nation's two top Congressional leaders:

Wisconsin, home to U.S. House Speaker Paul Ryan, now lives with export tariffs on its cheese, paper, ginseng, cranberries and motorcycles, Hackbarth wrote in an analysis. Because so much aluminum is produced outside the U.S., even local brewers are paying more for their aluminum cans.

Kentucky, home state to Senate Majority Leader Mitch McConnell (a Republican), now lives with $217 million worth of tariffs on its bourbon.

In metro Milwaukee, "employers including Harley-Davidson and Miller Coors have been on the forefront of opposition to the proposed tariffs," the Metropolitan Milwaukee Association of Commerce said in a statement.

The U.S. Chamber estimates that $1 billion of Wisconsin exports are threatened by retaliatory tariffs. The estimate is included in a state-by-state analysis of the potential loss of American jobs and exports, posted last week on the U.S. Chamber website.

According to the Tax Foundation, a conservative fiscal watchdog in Washington, D.C., Trump’s trade policy already has the potential to pressure average U.S. wages measurably lower — declining 0.3 percent as the effects filter through.

Some 365,000 U.S. jobs will vanish under the existing raft of Trump administration trade restrictions, according to the Tax Foundation's weekly scorecard on the cost of the trade war.

The trade fight, under the current set of new tariffs, will wipe out a quarter of the potential gains from the Tax Cuts and Jobs Act, the landmark tax reductions that Congress passed in December, the Tax Foundation estimates.

“The administration is threatening to undermine the economic progress it worked so hard to achieve,” Donohue said.

General Motors said it's prepared to shrink its U.S. production with jobs at risk. Milwaukee-based Harley-Davidson, known as one of the few remaining made-in-America icons, is prepared to shrink U.S. production and is moving some work overseas.

RELATED: Trump responds as Harley-Davidson announces plans to move more motorcycle production overseas

"These tariffs on steel and aluminum will result in unintended consequences and retaliation that will negatively impact other U.S. and Wisconsin-made products," said Kurt Bauer, chief executive of Wisconsin Manufacturers & Commerce, the state's most influential business group.

Mirk Buzdum, who oversees manufacturing operations at Utecht's company, receives emails from Canadian truck-makers who use American Sewer Parts products. The Canadians want to know what tariffs to expect in coming weeks.

“We told them that we don’t know, either,” Buzdum said. “That’s where we are right now — in limbo.”

U.S. steel prices have risen nearly 40 percent since January and are now 50 percent higher than steel in Europe, according to the U.S. Chamber of Commerce.

In normal times, Buzdum can predict steel and aluminum prices six months in advance. But now that aluminum and steel prices are caught up in the trade war, Buzdum said no one knows more than one day at a time.

(The situation with aluminum is even more complex because America barely has any natural reserves of bauxite, the main metal in the aluminum alloy, meaning other nations such as Australia, Brazil and India have a natural competitive advantage that has nothing to do with trade barriers.)

That kind of uncertainty can lead to a recession, according to a chorus of warnings from economists.

“If the trade war begins to sow doubts in the minds of business leaders and investors about the management of the economy, and those people then hold off from expanding or investing, that change in sentiment can spark a downturn,” said Levy at the Chicago Council.

The Federal Reserve has chimed in, saying that the escalating trade war already is slowing investment and threatens to undermine economic activity.

“Plans for capital spending had been scaled back or postponed," according to minutes released Thursday of the Fed’s June 12-13 policy meeting.

Trade tensions with Canada seem surreal to Buzdum at American Sewer, who calls Canada the 51st U.S. state. It has been 24 years since NAFTA married the U.S., Mexican and Canadian economies into a massive single free-trade bloc. To many industries, NAFTA has all but erased the borders.

Buzdum sees a populist appeal to those who think that blocking imports protects jobs — even if the American economy already is so thoroughly intertwined with the rest of the world that trade barriers tend to have the opposite effect.

"There’s a disconnect," Buzdum said. "People get sold on the rhetoric, but it’s not practical, and you can’t apply it on the ground."

Levy at the Chicago Council shares that view. "You have large segments of the public who feel that something bad has happened to them. Their wages and benefits have not kept up, they are angry," Levy said. "The explanation that the foreigners did it is an easy winner."

There’s a big problem with that thinking, Levy said. "It’s wrong."