If you want to understand how President Donald Trump's trade war is acting as a drag on the U.S. economy, you have to take a look at businesses like the one Paul Shekoski runs in southern Wisconsin.
Shekoski is the CEO of the Primex Family of Companies, which includes three divisions that manufacture and sell clocks, timers, and other small gadgets and gauges, many of which are used in the so-called "internet of things"—a catch-all term for internet-equipped devices that aren't computers or tablets. Without Primex equipment, Shekoski says, the clocks in many hospitals wouldn't remain synchronized and the bells in many schools wouldn't ring. He has about 160 employees in Wisconsin, but most of the products Primex sells are dependent on imports from China—some of which are now subject to 25 percent tariffs, and others that will be subject to 10 percent tariffs starting on September 1.
There's not a whole lot that a business like Shekoski's can do to shield consumers from the cost of tariffs. He says the higher costs created by those import taxes get passed along to his buyers like any tax would. But the tariffs are also having a secondary effect on Primex—and lots of other businesses thorough the economy—by forcing the company to make expensive changes to its supply chain.
"We've gotta make a several-million-dollar investment, with some uncertainty on it, and take our management time and our bandwidth to go work on this instead of working on new stuff," Shekoski says. "We're not making the investments for our future right now, because we're making the investment just to stabilize something—just to stop the hemorrhaging. That's impacting our long-term growth."
That sort of reallocation of limited resources seems to be happening across the board. The uncertainty created by the escalating trade war with China has both large and small businesses cutting back on investments that might otherwise be driving economic growth. Domestic investment dipped into negative territory during the second quarter of 2019, according to Bureau of Labor Statistics data, and a Bloomberg metric that tracks business executives' opinions about trade shows a level of uncertainty not seen since before the North American Free Trade Agreement was signed in 1994.
"If a manufacturer has to source different parts from different countries, that's not just as simple as picking up the phone and saying 'do you have this part and can you send me 500 of them,'" said John Kirchner, executive director of congressional and public affairs for the U.S. Chamber of Commerce, during a Thursday event organized by Tariffs Hurt The Heartlands, a pro-trade coalition of businesses. "It's a long, expensive process for employers and businesses to change up their supply chains."
This week's stock market volatility, coming on the heels of last week's signaling of a potential currency war between the U.S. and China, has only added to what's already been a jittery year for businesses. As bad as Trump's tariffs might be for the economy, what's possibly worse is the uncertainty created by, for example, announcing new tariffs that will take effect on September 1 and then announcing that some of those tariffs would be delayed until mid-December for what appear to be entirely arbitrary and politically motivated reasons.
Combine that with Commerce Secretary Wilbur Ross's admission this week that the tariff costs are indeed being paid by Americans, and it's now painfully obvious that the White House has been conducting this trade war with little long-term strategy.
No wonder businesses are hesitant to do much. "Their paralyzing uncertainty is driven by the president's veering from one position to another," writes Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. "Businesses seem increasingly convinced that he doesn't understand the basics of international economics."
To be sure, there are other factors causing the American economy to slow. Germany, a major trading partner and global economic driver, is tilting towards recession. Despite a cavalier attitude about it in Washington, D.C., there is growing evidence that the $22 trillion national debt weighs down economic growth. But the trade war is a self-inflicted wound that could be cured with a simple reversal of executive action.
Even White House officials admit that Trump's trade policies are the primary driver of the current volatility—but, unfortunately for many American businesses, the president and his top economic advisor don't share that opinion.
How does White House, writ large, feel abt market volatility? Most see trade uncertainty at fault, but "it is what it is," per to two senior administration officials.
POTUS' and Navarro's view that Powell/Fed are the culprits is not widely held one, these officials say.
— Kayla Tausche (@kaylatausche) August 15, 2019
As the trade war saps money out of the economy in the form of taxes and weighs down economic growth by reducing investment, there's an important political feedback mechanism being triggered: a slowing economy and fears of a recession are bad news for an unpopular president a little more than a year away from an election.
That's why this week feels like an inflection point in the trade war. Will the Trump administration press onward with policies that seem to be hurting not only businesses and consumers, but also the president himself? Axios's Jonathan Swan reports Thursday that Trump's campaign team "is worried about polling data from Michigan, Pennsylvania and Wisconsin, amid the economic signals."
Public polls suggest they are right to worry. A May poll of voters in Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin by Quinnipiac University found that only 39 percent of voters in those states approved of Trump's handling of trade while 53 percent disapproved. That was despite 71 percent of voters saying the economy was "good" or "excellent." If the economy falters, it's fair to bet that opinions of the trade war will fall further—and the three months since that poll was taken have not provided Trump with any demonstrable victories on the trade front.
In Wisconsin, Shekoski thinks Trump is not seeing the whole picture. Smaller businesses, he says, have been "caught in the undertow" of the tariffs when they have little to gain from the president's trade policies.
"The indirect costs are just enormous," Shekoski says.
So if you want to understand how President Donald Trump's trade war is acting as a drag on the economy and sabotaging his own chances for re-election, well, you can just keep on looking at businesses like the one Paul Shekoski runs in southern Wisconsin.