Global bellwether 3M shows scars from Trump’s harmful trade war

Economists, like me, generally rely on lots of data when assessing the economy’s strength. But we also have our rules of thumb and anecdotes.

Over the years, a favorite of mine has been the performance of 3M, an iconic American economy that operates all over the world selling a broad range of products used by businesses and households; think Scotch Tape and Post-it Notes.

When 3M is doing well, it’s a good bet that so too is the global economy, and when 3M is struggling, the economy is also having problems.

{mosads}3M stumbled badly during this year’s first quarter, as its revenues and profits fell well short of stock analysts’ expectations and it announced 2,000 job cuts. Not surprisingly, the global economy appears equally as wobbly.

This a big comeuppance for the company and the economy. As recently as this time last year, both were doing well. 3M’s profits were strong, and the global economy was enjoying solid growth almost everywhere. Unemployment was falling.

What happened? It wasn’t Brexit, though the U.K.’s botched efforts to leave the European Union haven’t helped.  And no, neither the U.S. government shutdown nor the Federal Reserve’s interest rate hikes are significant enough to cause this kind of broad-based global weakness.

The culprit is President Trump’s trade war, which began in earnest with higher steel and aluminum tariffs early last year and continued with tiffs with the European Union.

Then, he took the fight to Mexico and Canada over a renegotiation of the North American Free Trade Agreement (NAFTA). Finally, and most significantly, he has staged an epic battle with China. Next up, there could be much-higher tariffs on imported vehicles and parts, most of which come from Germany, Korea, Japan and Mexico.

The trade war has done a surprising amount of economic damage. Economists did the arithmetic of multiplying the higher tariffs by the dollar value of the impacted global trade and concluded that the trade war should shave at most a tenth or two off of U.S. real GDP growth.

That is, if not for the trade war, our economy would have grown just over 3 percent last year, compared with actual real GDP growth of not quite 2.9 percent.

However, this arithmetic failed to account for the trade war’s fallout on the psyche of global business people, who have been spooked by it. The vituperation between far and away the two biggest economies on the planet, the U.S. and China, has been too much to bear.

Business sentiment surveys, from the German Ifo and the Japanese Tankan abroad to the National Federation of Independent Business’ Small Business Optimism and Duke CFO surveys here at home have all taken a hit.

Global business investment has suffered. Businesses have not cut back on their investment; instead they appear to have put big investment projects on hold until the dust settles on the trade conflict.

Businesses can navigate around the 10-percent higher tariffs the president has imposed on Chinese goods to date by raising prices a bit, eating some it through lower profits and sourcing from other places that don’t face the higher tariffs.

Vietnam, for example, is enjoying stronger exports to the U.S. as businesses shift production to that country from China.

But 25-percent higher tariffs, which Trump is threatening unless the Chinese relent on U.S. demands, would be too much to avoid. Businesses would have no choice but to completely reorient their global supply chains and thus where they invest. They are not going to make these investment decisions until they get clarity from the president on his trade war.

Fortunately, the president and his trade negotiators are strongly signaling they are close to a deal with the Chinese. The stock market is back near record highs on investor optimism that Trump and Chinese President Xi Jinping will agree to some type of arrangement ending the war by Memorial Day. Business sentiment has ostensibly stabilized in recent weeks and so has investment.

None of this is to say that Trump will realize his objective of getting the Chinese to play by the global economy’s rules. There is plenty of evidence the Chinese have flouted intellectual-property rights and cybersecurity laws and made it improperly difficult for foreign companies to enter into their markets.

President Barack Obama’s strategy to address this problem was the Trans-Pacific Partnership (TPP) — the free-trade deal among Pacific Rim nations including the U.S. that excluded China because it didn’t play by the rules. China would have had an irresistible incentive to change its behavior to become part of the TPP club.

{mossecondads}Ripping up the TPP deal was Trump’s first executive order, presaging his strategy of higher tariffs to get the Chinese to change.

However, if the trade deal he struck with the EU or the renegotiation of the NAFTA deal with Mexico and Canada last year are good case studies, then the deal he seems about to strike with China will be largely much ado about nothing — largely for show, with little substance.

But that will be better than carrying on with the trade war. If Trump fails to come to an arrangement with Chinese soon, investors and businesses will be disappointed, stock prices and the global economy will slump, and a lot more companies like 3M will be announcing poor earnings and layoffs.

Mark Zandi is the chief economist for Moody’s Analytics.