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17th of July 2018

Economy



US factories feel chilling effect of tariffs will halt revival

When Tesla rival SF Motors chose a place to manufacture its upmarket electric cars for the US market, it bypassed the US west coast and the manufacturing-friendly southern Sun Belt to head straight for the crossroads of the American Rust Belt.

The area around South Bend, Indiana, which includes the town of Mishawaka where the Chinese-backed company will start making electric cars for sale next year, has had decades of practice manufacturing automobiles, and a skilled labour force that can be quickly trained to make the greener vehicles of the future. 

Workers in South Bend were making electric horseless carriages for the legendary US carmaker Studebaker back in 1902. That legacy of manufacturing skills, and the presence of physical infrastructure such as the old Humvee factory, gave the small Indiana town the edge with SF Motors, a privately held company whose largest investor is Chongqing-based Sokon, a Chinese sport utility and commercial vehicle maker.

SF Motors has promised to invest at least $160m to equip an advanced factory on the site — hiring back most of the 330 workers who lost their jobs when the same plant closed last year — to create 467 jobs by 2020. 

That is less than half the roughly 1,000 employees who worked at the site in its heyday at the start of the 21st century when it made Humvees. But it is nearly 50 per cent more than worked there in recent years, when it made Mercedes SUVs.

The plant’s revival is part of a trend that has put several Midwestern US states in the top tier for factory job gains in the US since the 2016 election of President Donald Trump, an avowed champion of American manufacturing.

The strength of manufacturing job gains in states that include key battlegrounds for congressional elections in November is good news for Mr Trump’s Republican party. The biggest threat to that revival in the Midwest, however, is Mr Trump’s trade policy.

Manufacturing jobs in Mishawaka plummeted after the financial crisis but since then factory job growth here has handily outpaced the US average.

“They know how to build quality vehicles, we want those people working for us”, said Jason Wallace, marketing and branding director of SF Motors. “A lot of the skills that you need to make a quality vehicle and the partners that you need are still in the Midwest.”

“Indiana: a state that works,” said SF’s founder and chief executive John Zhang, echoing the state’s motto, at a ceremony to celebrate the investment. “For us to build a plant from zero up is not that easy, it takes time. All the workers here are highly trained, and we have good support from the UAW [the United Auto Workers union], so we can build this plant to full capacity in a much shorter time”, he told the Financial Times in an on-site interview.

Cecilia Coleman and Denise Davis, two of the workers who lost their jobs when the previous owners of the factory halted production late last year, said they were thrilled to be starting new jobs in a spanking new electric car factory. “This place is going places,” said Ms Coleman, clad like all the workers in a royal blue SF Motors hoodie that looks more Silicon Valley than Rust Belt.

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Neither she nor Ms Davis would have been unemployed for long, even without SF Motors, they say. Several workers confirm that many local employers are hiring in the area — including a factory building Humvees for the military right next door, and several motorhome manufacturers in nearby Elkhart, Indiana, home of the US recreational vehicle industry.

For decades, the industrial Midwest has been perceived as being in inexorable decline, but the reality is different.

Places like Mishawaka illustrate the mini-revival in manufacturing employment that is taking place in states like Indiana, Illinois, Wisconsin, Ohio, Iowa and Michigan, which have a proud industrial legacy that stretches back over 100 years. 

Over the past couple of years, it has been those Midwestern states that have shown some of the strongest manufacturing employment gains in the US, adding factory jobs at a faster pace than the Sun Belt states of the south. 

From November 2016 to May 2018, Texas was the top state in the US for manufacturing job creation, as its oil, gas and petrochemicals industries boomed. But five of the top 10 states for manufacturing job creation were in the upper Midwest, including Wisconsin, Ohio and Michigan. Some of these states were ones where Mr Trump overturned expectations of a Democratic victory to defeat Hillary Clinton.

“It’s working out for President Trump,” said Mark Muro of the Brookings Institution. “Not only is the national economy doing well, but the industrial mix is favouring the upper Midwest.”

Justin Rose, a Chicago-based partner at The Boston Consulting Group, said that for the past 10 to 15 years, the southern states had been competing hard to attract manufacturing. They introduced anti-union “right-to-work” legislation, cut regulatory burdens, institutionalised training and workforce development and targeted incentives to lure manufacturers. The Midwestern states were late to the game, Mr Rose said, ”but now they are starting to catch up, pulling those same levers”.

Jeff Korzenick, chief investment strategist at Fifth Third Bank, says he thinks structural reasons are at play, too. “In the Midwest, it’s cultural, manufacturing jobs are still respected,” he said. “And the Midwest is cheaper, the cost of power is lower, cheaper real estate, great transport infrastructure”. 

Across the Midwest, however, fears are growing that Mr Trump’s attempts to improve the position of US manufacturing could derail the industry’s progress. The tariffs on steel and aluminium imposed this year have already rattled metal-consuming industries, and now there are waves of additional trade restrictions being implemented or threatened, including retaliation from other economies such as the EU, China and Canada. 

The steel and aluminium tariffs have led to some announcements of increased production in the US. Republic Steel, for example, has said it will restart its mill in Lorain, Ohio, in September, hiring about 80 workers in the first phase of a hoped-for ramp up to create more than 1,000 jobs.

Nucor, the largest US steelmaker by market capitalisation, said last month it expected its earnings for the second quarter to be more than double what they were in the equivalent period of 2017.

Steel customers, however, have been alarmed by the increase in the US price of the metal of about 50 per cent since last autumn. That is more than the 25 per cent tariff imposed by the administration, and much more than the modest increase in steel prices seen in Europe and China over the same period.

“It is an unbelievable mess,” said Edward Farrer, director of purchasing at Principal Manufacturing, which makes components for cars and other products in Illinois. “The US already had the highest steel prices in the world. Now it has by far the highest prices in the world.”

The metal typically accounts for 30-70 per cent of the cost of Principal’s components, and soaring prices threaten to make the company uncompetitive.

The company has not laid anyone off, but it has been avoiding filling vacancies. “Our people are able to make a nice salary, they can buy a home and raise a family . . . There are good jobs with skilled labour,” Mr Farrer said. “And if we start to lose these jobs, we’re going to have a hard time getting them back.”

For other US companies, it is the new tariffs on imported components from China, which took effect on Friday, that are the big concern. Austin Ramirez, chief executive of Husco International, which makes components for cars and mobile equipment in Wisconsin, said business had been good, thanks to a healthy economy and a boost from the business tax cuts passed at the end of last year. But he warned that the tariffs could have a chilling effect.

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“When there is uncertainty like this, everything kind of stops. It freezes instantaneously,” he said. “I’m not blind to the problems that the president is trying to remedy. But this feels like a counter-productive way to get at that.”

Many business people hope world leaders will pull back from an all-out trade war. But the fact that US tariffs and retaliatory measures from other countries are now going into effect, with no deal apparently on the horizon, is sapping confidence.

“When this was first mentioned, I thought: ‘Everyone is posturing, they will make a deal. It’s not good for anybody’,” said Mike Haberman, president of Gradall Industries, an Ohio-based excavator manufacturer. 

“We’re still hopeful that a resolution is possible. But I’ve stopped holding my breath. I have started to worry that those guys are sitting in their corners and not coming out.”

There are signs that similar fears are starting to have an effect on workers in the Midwest. Economists at Wells Fargo noted that the Conference Board’s survey of consumer confidence late last month showed “expectations fell sharply in the upper Midwest”, although optimism nationally was still high.

At SF Motors in Indiana, Mr Zhang wanted to stay out of the argument over trade. Is he concerned that trade tensions could derail his plan eventually to produce 50,000 electric cars in Mishawaka? “We hope the trade issues will be solved eventually,” he says diplomatically.

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