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Tariffs Have Hit U.S. Manufacturing Harder Than Initially Expected

The US manufacturing shrunk for the fifth straight month in December, with the monthly reading from the Institute for supply management (ISM) dragging down to its weakest point in more than a decade. The purchasing manager’s index (PMI) dropped to 47.2, a drop seen for the first time since June 2009, as global trade tensions continued to cause damage to the manufacturers.

Its been reported recently that US tariffs on imported goods, particularly those originating from China, have hit manufacturing and industrial output harder than initially thought. Federal Reserve economists Aaron Flaaen and Justin Pierce point out that the tariffs have not served the purpose it meant to be, that is to protect against what was deemed as unfair trade practices of trading partners. In contrast, they called for relative reductions in manufacturing employments and relative increases in producer prices.

According to Flaaen and Pierce, the additional taxes have not helped manufacturing employment or output, even as they increased producer prices. Previous data show that both industrial production and manufacturing employment were growing at a good pace throughout 2017 and most of 2018, despite the initial set of tariffs being imposed on solar panels and dishwashers in January of that year.

However, since the end of 2018, growth restrained as manufacturing has halted because of U.S.-imposed tariffs and punitive tariffs from its trading partners.

Adverse Effect on US Firms and Consumers

Another paper released by the National Bureau of Economic Research (NBER), points out that US tariffs are still almost completely borne by US firms and policymakers, despite policymakers’ confronting that they are not.

The study finds that in most sectors, these U.S. tariffs have been completely passed on to U.S. firms and consumers and the taxes are “only now having their full impact on U.S. import volumes.” In addition to that, the US trade deficit with the rest of the world recently narrowed down to its lowest point, according to Census Bureau. In the first 11 months of 2019, the deficit went down 0.7 percent, or $3.9 billion, from the same period a year earlier.

One week from now President Trump is scheduled to sign the “phase one” of the highly-anticipated trade deal with China, which should push off some of the pressure that manufacturers have been under for over a year now. Hopefully, both sides commit to the agreement and additional resolutions improve the trade conditions.

Trade uncertainty remains overhead with tariffs on two-thirds of imports from China, global activity remains dull, the dollar remains strong and these hindrances will continue to hold back manufacturing output in 2020.

Markets further slumped as an American airstrike on an Iranian military commander aggravated tensions in the Middle East. The S&P 500 closed down 0.7 percent. Brent crude, the global crude oil benchmark, jumped 3 percent to more than $68 a barrel.

 

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