Serving Northern St. Louis County, Minnesota

Trade war has economic storm clouds on the horizon

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Don’t look now, but there are signs that President Trump’s global trade war could have implications for the region’s economy— and not necessarily the kind that some folks were expecting.

With trade battles on multiple fronts, it’s a complicated picture, but Trump’s decision to hike tariffs on Canadian wood products and a wide range of imported goods from China could create problems right here in the North Country.

First, consider the case with China. As a massive exporter into the U.S. market, the Trump administration’s recent imposition of tariffs on a long list of products has rattled Chinese leaders and sent both Chinese stock prices and the value of the yuan dropping. As the New York Times reported this past week, Chinese leaders are hoping to develop new markets in other countries, although that’s going to take time. In the meantime, some layoffs are almost inevitable. Chinese exports were already slowing as the country’s leaders are focused on boosting domestic consumption and there’s concern in Asia that a prolonged tariff battle will upend China’s economic transition and further slow the Chinese economy.

Why should folks on the Iron Range care if China’s economy suffers? Here’s why: The rapid growth of the Chinese economy over the past two decades has sharply elevated demand for a wide range of basic industrial commodities, like iron ore and copper.

Copper is a particularly sensitive barometer of current and future economic conditions. Economists call it Dr. Copper for a reason, because its price is such a reliable indicator of the rate of global economic expansion. When growth spikes, copper demand increases and prices rise accordingly. When demand slows due to downturns in industrial production, copper prices fall.

That’s exactly what’s been happening since June, when the bottom fell out once again on the copper market. Jitters in China over trade have sent copper prices from a relatively robust $3.20 per pound earlier this summer to just $2.67 earlier this week. That’s a 15-percent drop in just two months.

Copper prices rise and fall, and they could quickly recover if the trade war with China were to ease in the coming months. If not, look for copper to stay depressed for some time, which is an outcome that should concern supporters of the proposed PolyMet mine. That project is economically tenuous even with copper at $3.20 a pound. At $2.67 a pound, it’s dead in the water. If you’re banking on PolyMet, keep your fingers crossed that the trade wars ease and China’s economy bounces back. Otherwise, it’s going to be a long wait for any new mines on the Iron Range.

A slightly different dynamic is at play in wood products, where prices have jumped, at least partially in response to higher tariffs on Canadian lumber imports. That would seem to boost the prospects for domestic wood products manufacturers, but only if demand remains steady while supplies from Canada are restricted.

The problem is, everything is connected.

When prices for building materials rise, the cost of new home construction rises as well. Combine that with rising interest rates and it adds up to trouble in the housing market. We’re already seeing that, as housing starts plunged by 12 percent in June and May starts were revised downward at the same time.

Investors are exiting the housing sector even in the face of a strong economy when one would normally expect robust housing activity.

So how does this affect our region? There are at least two examples right off the top of my head. The spike in building material costs has put the townhome project at Tower’s harbor at risk. Delays in permitting and platting prevented construction from moving ahead last year, and the delay proved costly. Construction estimates jumped sharply and forced the developers back to the drawing board as they worked to get the numbers back in line with market reality. If the project fails to go forward, which is now a higher possibility than before, the spike in construction costs and materials will be a major reason why. That’s just one project, but this same dynamic is being repeated over and over around the country.

And there are bigger implications for our area. As we reported this past week, the timeline for the proposed Louisiana-Pacific siding plant at the former Ainsworth plant site near Cook appears to be extending. While there’s reason to believe that the project remains probable, longer timelines always increase the risk from downside developments, such as the kind of collapse in the housing market that prompted the closure of the Ainsworth plant in the first place.

I listen-in every quarter to Louisiana-Pacific’s investor conference calls and they always note that future expansion plans at Cook are contingent on rising demand for their Smartside® siding product. That’s contingent on continued strength in the housing market, which now appears to be softening.

The unpredictable, indeed almost random, nature of Trump’s tariff decisions and their potential repercussions, are generating the one thing that businesses hate most: Uncertainty.

Major business investment, like board plants or mines, are long-term propositions. The current chaos being generated by the administration is giving heartburn to corporate board rooms everywhere. They may be placated, for now, by the big corporate tax cuts that Trump and GOP members of Congress enacted late last year. But those corporate tax savings are being overwhelmingly directed to stock buy-backs, which put more money in the pockets of big investors but offer nothing for workers and create no new employment. Given the uncertainty that Trump has injected into the economy, there’s little reason for businesses to invest in new facilities or equipment. While business investment is up modestly over last year, it’s driven almost entirely by the oil industry, which is recovering with rising crude prices. Take that out of the picture, and business investment is flat despite the massive windfall that Republicans handed to corporate America.

Trump was fortunate to take office at a time when the global economy was at close to peak performance. Through his tariff war, however, Trump has essentially been shoveling sand in the global economic gears, apparently in hopes that the machine starts to wobble in favor of U.S. industries. That’s possible, but it’s equally possible his actions will grind the whole thing to a halt, and that won’t help this region.

The global economy is more integrated than ever before, which means what happens in places like China or Canada, can affect us here in the North Country.

I’m in firm agreement with those who believe that the global economic edifice that governments, led by the United States, have erected over the past quarter century, has not served average Americans well. The current system produces a great deal of wealth, but here in the U.S. we’ve done a very poor job of ensuring that the benefits are widely shared. The recent tax cuts simply exacerbated that inequity by shifting even more of the nation’s wealth to the top one percent.

Which is why tariff wars offer little to average workers, other than higher prices for goods. As imposed to date, tariffs have provided a profits windfall for a handful of corporate sectors, but workers haven’t shared in the winnings. Trump claims there’s a boom in the steel sector as a result of his tariffs, but it’s mostly just fiction, as we report this week. Meanwhile, other sectors of the economy are starting to feel the ill effects.

Whether it’s enough to push the economy into recession remains an open question. But one thing’s for sure… the storm clouds are gathering.

Comments

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Scott Atwater

I find it amazing that someone can write about a trade war as if it's some kind of a new phenomenon in one paragraph, and then mention the long abandoned Ainsworth site in the next without making a connection as to why it was shuttered in the first place.

Wednesday, August 22
Lee Peterson

Trade is complicated, just as Marshall's article is thorough. There is a distinction between trade negotiations and a trade war. Now we're in several trade wars. Trump is throwing bombshells in every direction. One thing is certain: this method will result in unintended consequences. Kind of a small one already is the Harley-Davidson motorcycle debacle. The Donald went from blessing them on the White House lawn--to now asking Americans to boycott them!

Gosh, I just now saw on the news that China is doing another retaliation tariff. Estimates are that this one will cut our exports to China by about $30 billion.... heck of a deal!

Thursday, August 23
Scott Atwater

Sigh.....We've been in "trade wars" for the better part of the last 40 years. I think that we all know the results of the previous approach, especially in our region.

Tariffs are a tool in trade negotiations, although they aren't very useful if your opponent knows that you aren't willing to use them. Tariffs can be put in place, adjusted, and completely removed as conditions or circumstances change. The danger of political ideologues setting trade policy is that they aren't competent in things like trade negotiations. They aren't flexible or able to adjust with change by definition. This is not the case with President (4% GDP) Trump, he understands business and trade very well. As a matter of fact Trump proposed the elimination of all tariffs when meeting with our European trading partners.....they declined. If the goal is fair trade, and tariffs help us get there, sign me up for another six years.

Saturday, August 25
Lee Peterson

I don't know if he'll get another six years--unless it's in prison. Looks like the noose is tightening. The skeletons are coming out of the closets. The Donald is acting like a cat on a hot tin roof. When his highly secretive tax returns come out, it'll be--POOF!

How many times has the Donald been bankrupt? How many people has he let hang out to dry? Do you call it good business when his off the cuff tariff caused him to have to send $12 billion to the American farmers who are hurt by that tariff? Was that tariff well thought out? $12 billion that goes straight to the national debt?

Let's make a list of businessmen who have done well, paid their taxes, and have never gone bankrupt I admire those folks.

Saturday, August 25
Scott Atwater

American Farmers have been subsidized since the 1930's. As unfair trade continues, the increased subsidies were going to happen anyway.

Many Billionaires have filed for bankruptcy at least once, if not several times. Henry Ford, Walt Disney, H.J. Heinz, Milton Hershey, etc. The American way is to never give up, keep trying.

The only crime Trump is guilty of is allowing a thinly veiled coup d'état go unchecked for the last 24 months.

Saturday, August 25
jtormoen

Just as an aside ... has anyone done a study to determine if Orrcountry might have adopted a new identity

Sunday, August 26
Lee Peterson

You have to get a kick out of how the once "free marketers" have pivoted with Trump into being impulsive, trigger happy subsidizers who pay for these new subsidies by borrowing from China! How ironic. I guess I'd try disguising my name as an outboard motor also.

False equivalency is another trademark of the Republicans. Henry Ford was not a billionaire or a millionaire when he filed for bankruptcy. He was just starting out from his garage. In fact, in 1903, for about $30,000, Henry started the Ford Motor Company, which has never gone bankrupt. The same cannot be said about the Donald. His three Atlantic City casino bankruptcies alone robbed people of billions of dollars. He's even bankrupted the New York Trump Plaza Hotel. These and other bankruptcies have occurred well into his career. And had the Donald not gotten into the money laundering business with the Russians, he'd be on skid row right now.

But, the Trumpie birds are beginning to sing to the prosecutors now, and it's only a matter of time.....

Monday, August 27
bonfire

He makes a mess out of everything, our dunning-kruger president. Many people have experienced bosses or people in power over us just like him and breathed a huge sigh of relief when they finally managed to get away from those folks.

Moving the WH flag from half-staff to full staff honoring McCain and refusing WH aides' statement praising McCain's service are just the first in a series of tantrums I expect from him as the week goes on with McCain tributes. I think his rolling out a supposed trade "deal" with Mexico today is an attempt to get some kind of "win" in his mind. McCain and not him dominating the media including Fox News infuriates him.

Monday, August 27
bonfire

WSJ: Trump administration pledging $4.7 Billion to offset farmers trades losses. Trump's war on trade is going beautifully.

Tuesday, August 28
Scott Atwater

New news: Trump's US/Mexico trade deal prevents China from using Mexico as a back door to export tariff free into the US.

Old news: American Farmers subsidized since the 1930's.

Good news: Trump's approval rating 46%.

Tuesday, August 28
jtormoen

Lacks only a reference to Wellstone, and to packsackers. Then I am convinced.

Oh, and FOX News

Tuesday, August 28
bonfire

Lol, JT but as I recall, it's fair and balanced Fox News.

Tuesday, August 28
Lee Peterson

Ya gotta keep a sense of humor. And appreciate some unintended ironies: Scott Atwater went out of business because it didn't understand the outboard motor business and couldn't adapt to reality.

Wednesday, September 5