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7/31/2019

Tariffs, Uncertainty, Risk: A Wake-up Call for a Slowdown

Tariffs, Uncertainty, Risk: A Wake-up Call for a Slowdown

23, 2019

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This guest column was written by John Wiborg of Stellar Industrial Supply Corporation.

Uncertainty and risk stirred by threats of tariffs, not the tariffs themselves, are what tells us it’s time to prepare for a manufacturing sector slowdown.

In May, manufacturing employment gains were weak. Sure, bad weather battered the industry earlier this year and key indicators say the sector is still relatively strong. However, when geopolitical decisions, whether regulatory, tax, or immigration, appear to be made arbitrarily, it’s going to cause pullback by business leaders. A small recessionary phase toward year-end seems likely.

Tariffs are a complex, multi-variant equation and how it all settles out is anybody’s guess. Without a description of the overarching goals and an articulated pathway to achieving those goals, the tariffs become reactionary. This random approach causes uncertainty, and uncertainty equals risk, and risk makes business leaders delay or cancel capital investments.

Balancing Global Relationships with Tariff Impacts

We can all agree that free trade among partners means everyone should operate under the same rules, and with rule of law comes wealth creation. Free trade also creates the opportunity for free-flowing capital and is a catalyst for reducing poverty, which we’ve witnessed happen over the past 30 years. When players don’t all compete by the same rules, it results in unbalance. Tariffs ultimately may be a good tool to get our partners to set a new, level playing field and create a standard set of rules that everyone lives by, including rule of law governing intellectual property and ownership rights.

Protecting ownership rights is important. Saying you want to create manufacturing jobs domestically in the short-term is another noble thought. But that cannot come at the price of damaging relationships with countries with whom we are historically good trading partners.

China has a whole lot more to lose than we do; at some point, they will need to give at least the appearance of acquiescing to some of our demands. That too will generate even more animosity and more unknown risk. Meanwhile, farming, small business, and other domestic sectors will feel the impact.

Considering Capital Investments

The booster rocket phase of the early Trump Economy is over. When the Trump administration came in, it lowered risk in the form of a lowered tax burden and reduced regulation, therefore increasing confidence and willingness to invest, particularly in new technology and processes to increase productivity.

A great deal of capital investment over the past two years has yet to be fully deployed. Rather than making new capital investments, businesses in the second half of 2019 will instead focus on managing operations more efficiently and optimizing and driving value from prior investments. Concurrently, labor rate hikes will cause manufacturers to put a renewed emphasis on automation and productivity enhancements.

Addressing Labor Shortages

For the manufacturing sector, there is a continued shortage of both skilled and unskilled labor. An immigration policy that could address labor shortages both near and long-term would be ideal, but unfortunately, that legislation is likely a long way off.

Many of my peers are grappling with how to get more output with the people they have today, without overworking them in an effort to increase efficiency and results. In this climate, businesses need to get better at culture-building, competing, recruiting, and retaining talent.

Moving into next year, the 2020 election will further underscore the feeling of increased risk and economic uncertainty. The current climate of tariffs, uncertainty, and risk is a wake-up call for a slowdown. Smart companies should start preparing now.