Tariff Tussles: Economists Expect S.C. to Bounce Back
Monday, December 10th, 2018
In an era when Washington policy shifts come via Twitter, it’s not easy to forecast long-term trends in international trade, Doug Woodward told reporters at the University of South Carolina’s 38th Annual Economic Outlook Conference.
The back-and-forth between the U.S. and China over tariffs has been particularly challenging.
“It’s a constantly changing situation,” said Woodward, director of research at USC’s Darla Moore School of Business.
Retaliatory tariffs imposed by China, Canada, Mexico and the European Union have created hurdles for South Carolina exports for 2018, but Woodward said the state could benefit from new trade agreements being negotiated.
President Trump has imposed tariffs on imports such as aluminum and steel and has announced the potential for further levies if existing trade deals aren’t renegotiated.
“It’s surprising, the extent to which he’s been so aggressive,” Woodward said during a presentation at the conference, held Dec. 4 at the USC Alumni Center.
International trade plays an important role in the South Carolina economy. The state is home to production facilities for international brands such as BMW, Honda, Michelin and Volvo. According to federal data, 133,000 Palmetto State jobs are directly supported by foreign-owned companies.
“Since our very beginning as a state, we’ve been a trade-oriented state,” Woodward said. “We’re actually a state that has a history of opposing tariffs.”
When China retaliated with a 25 percent duty on U.S. soybeans, it caused a nationwide price drop that impacted South Carolina farmers. China’s retaliatory 40 percent levy on autos shipped from the U.S. creates risk for the BMW factory in Spartanburg County, which is the leading U.S. automotive exporter by value.
BMW and its suppliers are part of a large and economically influential automotive sector in South Carolina.
“Every 10 jobs that are created or supported directly within South Carolina’s automotive cluster also create and support about 27 jobs elsewhere in the state’s economy,” said Joey Von Nessen, a USC research economist. “Unfortunately, that process also can work in reverse.”
Von Nessen said there’s been a drop in hiring by South Carolina’s employment services sector, which includes companies that provide temp workers.
“Manufacturers rely, more so than other industries, on a contingent workforce,” Von Nessen said.
Data from the U.S. Census Bureau shows that South Carolina has exported nearly $28.9 billion worth of goods through October 2018. That compares to $26.8 billion over the same period in 2017.
Looking specifically at the category that includes vehicle and parts shipments, South Carolina has sent nearly $1.62 billion worth of goods to China through October, compared to $2.21 billion over the same period in 2017.
BMW officials have said demand for vehicles produced in South Carolina has not waned.
BMW has an assembly plant in China, as well as a factory that produces engines – something it doesn’t have in the U.S., although it has hinted at the possibility.
Woodward pointed out that China requires foreign companies manufacturing in their country to join with a Chinese venture partner.
“China’s very smart about how they negotiate,” he said.
China is not the only country in trade conflict with the U.S. Trump and the leaders of Canada and Mexico recently reworked the agreement between the three countries. It awaits ratification by Congress and its Canadian and Mexican counterparts.
Under the proposed deal, automobiles would need to have 75 percent of their components manufactured in the three countries to avoid tariffs. The current threshold is 62.5 percent.
“I think that’s going to be a positive thing for our state,” Woodward said, given its potential to attract additional auto parts manufacturers and/or the BMW engine factory.
In addition, up to 45 percent of auto parts will need to be made by workers making at least $16 an hour.
“Mexico’s going to have to raise their wages,” Woodward said. “That’s going to level the playing field.”
Woodward said he expects South Carolina to bounce back from the current trade-related challenges.
“The U.S. is the most lucrative market in the world and people want to have access to that and we’re finally taking advantage of that,” he said. “Companies want to be here. They know those threats are real.”