By: Greg Owens, Co-Founder and CEO, Sherrill Manufacturing Inc.
We have entered a new post-pandemic phase in world economic order. Deglobalization is now upon us. It started with a relatively “slow impact” move to decouple from China. This was characterized by diplomacy followed by limited and low-percentage tariffs on certain Chinese goods. Two years of pandemic related supply chain issues, increased Chinese aggression and now the invasion of Ukraine by Russia have turned the argument for “world peace through economic interdependence”, or globalization, on its head. In a time when the unimaginable has become reality and predictions are near impossible to make, one thing seems ironclad: Globalization as we know it is dead and the world is re-imagining “a new world economic order”, all this during a violently turbulent time in world economic and geopolitical history.
A central part of this process involves reshoring much of the manufacturing base that the United States has lost over the past few decades, mainly to China. While eliminating virtually-all tariffs on imports from countries with low or non-existent worker protections was always problematic, standing by while China strategically cherry-picked which industries to dominate through unfair trade practices has been especially devastating. It has left us with gaping holes in our supply chains (scope), as well as a drastically reduced industrial base in terms of production (scale). Once-vibrant American industries, such as pharmaceuticals, steelmaking, consumer products, electronics, and textiles, to name a few, have been decimated if not wiped out. The rebuilding process will not happen on its own and will require some degree of planning along with a lot of nurturing. Both will need to be pursued at significant scale in order to create the correspondingly significant result that is necessary to resolve the issues.
From the top down the government appears is beginning the first baby steps. At DOD a third round of analysis is identifying exposure within the supply chain for defense-related purchases from pharmaceuticals to aerospace. Industries that are critical to the future of our economy such as chips are receiving funding, both federal and state, in the name of national security. Even climate change policy is working its way into the conversation in bills like infrastructure and Build Back Better initiatives which include Buy American language if not outright funding for projects relating to clean energy. It seems to be conventional wisdom in Washington, on both sides of the aisle, that economic security and national security are now one in the same and that rebuilding our industrial base in scope and scale is critical.
The truth is that the government simply cannot organize this entire effort on their own. The scale at which reshoring of the industrial base needs to take place and the scope that it covers is simply too large to micromanage from the top down. While direct federal funding, tax breaks, procurement rules, etc., can be helpful to some extent, the best way to accomplish the bulk of the work that needs to be done is from the bottom up. This angle involves creating a market for those who are inclined to invest in reshoring production of something assuring them that they have a place to sell what they produce at a reasonable profit. Good old-fashioned capitalism and free market economics will do the rest.
The term “level the playing field” has been overused but is exactly what is needed in order to foster a renaissance in manufacturing in America. That, and perhaps access to funding to cover part of the startup costs and working capital necessary to start a new business.
Surprisingly the solution to “leveling the playing field” is quite simple. Tariffs are the answer. We already have a tariff system in place; all the legal infrastructure exists already. We simply need to be willing to raise our actual tariffs. And not against a specific nation out of anger or frustration, but for all imports. Tariffs that apply by default to all countries with whom we have ‘Normal Trade Relations’ are found in our ‘Column 1’ tariff schedule. Every nation in the world except Belarus, Cuba, North Korea and Russia are entitled to our Column 1 tariff schedule. (Those four countries get our Column 2 tariff schedule).
If you can believe it, Congress hasn’t passed a holistic tariff schedule since 1930. Since then, we’ve just cut tariffs on a tit-for-tat basis as part of deal making in Geneva. And even here, we’ve only revisited our default Column 1 tariffs three times since 1961. The last Geneva tinkering to our Column 1 tariffs was in 1994.
While our actual tariff rates have stagnated, the infrastructure that organizes and executes tariffs is a fine-tuned machine that is constantly improving. Known as the Harmonized Tariff System (HTS), its beauty is that there are tens of thousands of individual tariff codes for every conceivable product making their application exceptionally elegant.
Raising our Column 1 tariffs need not affect those countries with whom we have bilateral (or regional) free trade agreements, as they get their own tariff schedules pursuant to those agreements.
In short, the mechanism to level the playing field and stave off unfair competition from non-market economies already exists. We just need the political will to use it.
The United States is the largest consumer market in the world and our experiment that opened this market to countries like China in exchange for what we expected would be democratic and economic reforms has proven to be a total disaster. At this juncture granting near-free access to our market to China and other non-market economies via our Column 1 tariffs simply makes no sense. What is important to understand is that tariffs need not be an all or nothing one size fits all approach. To the contrary the process can be strategic, addressing specific countries and then within the tariff schedule specific products with different percentages and flat rates to match the strategy. This approach will create the climate necessary to foster investment in domestic manufacturing while protecting consumers from unnecessary inflation in areas where no domestic production will ever take place. An example of this would be to put tariffs on toasters (we no longer make toasters here but would if we phased-in tariffs on toasters), but not put them on pepper, unless or until someone can economically grow pepper corns in the United States.
As the federal government moves to ensure that our national security and economic interests are protected in a few key industries, they must also create the environment for the private sector to initiate a renaissance in American manufacturing. This country was built with a Protective Tariff, averaging between 40% and 50% for much of a century between 1824 and 1930. Our home market will be clambering for investments which will be an opportunity for Wall Street to get their money out of China and return it to the United States. So top-down or bottom-up? We were built from the bottom up, and should not be afraid to again embrace a protective tariff.