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Turning friends into targets

Be glad you aren’t the CEO of a major machinery manufacturer in the new era of Donald Trump

Ever since Donald Trump sold 62 million American voters on the idea that, by applying border taxes, he could recreate a manufacturing landscape last seen in the 1950s, there have been sweat stains on the collars of manufacturing executives everywhere. Now, more of those executives within the U.S. are speaking out about what they think of that idea.

When it looked like implementation of such a tax was imminent, just a few months ago, John Deere’s CEO Samuel Allen appeared on CNBC to voice his objection.

“I think, without a doubt, any form of protectionism or nationalism, on the whole, is not beneficial for any global company like ours,” Allen said.

The recoil had started soon after the election, and then continued to build. By the Detroit International Auto Show in January, when Trump had turned his Twitter rage on the auto sector and was promising a tariff in the order of 30 per cent, Fiat Chrysler CEO Sergio Marchionni voiced his unease at the the uncertainty Trump was creating.

“We need clarity,” Marchionni said. “It’s put everything back on the back burner for the time being.”

What the automotive and farm machinery industries want is confidence and a dependable global trade environment, he said. But that assurance hasn’t come.

Yet even with those and other extraordinarily public comments from CEOs, a decision to tear up NAFTA (instead of renegotiating it) was apparently only averted by last minute phone calls from our prime minister and from the president of Mexico.

Plus, the U.S. has already pulled out of the TPP and U.S.-Europe trade deal negotiations.

All manufacturing sectors, including farm equipment, depend on a global supply chain to build components in the most cost-effective and efficient way possible.

“Undoing globalization is like taking a wrecking ball to a building,” said Peter Hall, vice-president and chief economist at Export Development Canada, during a presentation to Manitoba exporters in May. “The ball swings one way, then it swings right back. It’s going to bounce through that neighbourhood and take all the buildings out.”

“When you talk about tearing up NAFTA, that’s like putting a 3.5 to 4 per cent tariff on everything you ship south of the border,” Hall said. “That’s not very much when you consider what’s being discussed in terms of a border adjustment tax. We’re talking somewhere between 10 and 20 per cent. Can you imagine the carnage that happens with something like that?”

He answered his own question: “A 10 per cent border tax drops GDP by four per cent. That’s more than double the growth we got last year. So you can see a picture of that pushing us into a very complicated recession. Jack that up to the publicly discussed 20 per cent, and it’s more than double that. That’s more in the Great Depression territory.”

At the G7 Summit in Sicily in late May, the U.S. president was widely seen as a destabilizing influence, unwilling to support the overall vision and objectives of the other leaders.

Angela Merkel’s speech, given shortly after the G7 meeting concluded, suggests she sees a difficult relationship ahead between her country and the U.S. The U.K.’s Independent newspaper quoted her as saying, “The times in which we can fully count on others are somewhat over, as I have experienced in the past few days.”

Chrystia Freeland, our own foreign affairs minister, echoed that sentiment in a speech to Parliament in June. But this time the reference to the U.S. was explicit and not implied.

The policy statement issued after the conclusion of the May G7 meeting was unusually short. And the wording on the subject of international trade was pretty bland. Although the group committed to “keep our markets open and to fight protectionism,” the second part of that sentence “while standing firm against all unfair trade practices,” seems to offer the U.S. administration an easy out should it decide to implement border tariffs.

Germany’s der Spiegel magazine reported that during a meeting with EU leaders in Brussels Trump declared, “The Germans are bad, very bad (when it comes to trade). See the millions of cars they are selling to the U.S.… Terrible. We will stop this.”

What the president overlooked — or doesn’t know — is that German carmakers, like many global brands in the ag equipment sector such as Kubota, have made significant manufacturing investments inside the U.S. The BMW plant in South Carolina, the firm’s largest, builds cars for the domestic market as well as for export, as does Kubota’s. That “standing firm against all unfair trade practices” (real or imagined) proviso seems to be perfectly suited to apply tariffs to German automobiles — or anything else.

AEM, the association that represents U.S. ag equipment brands, wants its members’ voices to be heard as the start date for NAFTA renegotiations draws nearer. It has put out a call to its member companies encouraging them to provide comments, which it will submit to the U.S. Trade Representative during the upcoming consultation period. That reflects how important trade relationships are to its membership.

That isn’t surprising to Hall, who believes strong opposition from all U.S. industry leaders will ultimately prevent new border tariffs from being imposed.

“The right question is, how is all of this going to affect America?” he said at that Manitoba presentation. “Nobody (in the U.S.) is going to listen if Canada or Mexico squeaks. But regular Americans will listen if they understand what these measures will do to them.”

That, more than anything, will likely determine how far the Trump administration tries to go in disrupting today’s pattern of globalized trade. But if the comments I heard from some Americans on a trip to the Midwest in May are any indication, more than a few believe the world outside the U.S. is the way Trump says it is.

For example, I was told by my cabbie en route to the Moline, Illinois airport it was only because of taxpayer funding syphoned out of the U.S. that countries like Canada get to afford state-funded health care. She wasn’t alone in expressing the view that the U.S. is constantly being cheated and played for a sucker by the rest of the world.

In fairness, however, I spoke with at least as many Americans who were disgusted with the actions of the president. But with strong ideological support from much of the Republican base that still buys into his rhetoric, broad border adjustment taxes remain a risk, even though Americans stand to lose as much as anyone if they’re imposed.

“By America’s own calculations, direct and indirect jobs that depend on trade with Mexico amount to 1.2 million, 360,000 in Texas alone,” said Hall. “For Canada, the numbers are even greater. 1.7 million jobs depend on exports from the U.S. to Canada. 32 states count us as their No. 1 international destination for exports. Nine more states count us as number two.”

“And I don’t think they’re going to be very happy to hear that their jobs are going to be compromised by the very-well-worked-out supply chain interactions between Canada and their particular state,” Hall added.

But keeping global trade flowing relatively freely, as it has been, isn’t the president’s objective. He apparently sees other countries as foes to be economically dominated.

After Trump returned from the G7 meeting in Europe, his two top advisers, H.R. McMaster and Gary Cohen penned an open letter in the Washington Post that provided this insight into the president’s point of view:

“The president embarked on his first foreign trip with a clear-eyed outlook that the world is not a ‘global community’ but an arena where nations, non-governmental actors and businesses engage and compete for advantage.”

As the U.S. president endeavours to turn allies into competitors, the clarity Marchionni hoped for that comes with a stable and predictable global order for manufacturing seems even further away now than it did in late January.

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CG Machinery Editor

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