Tariffs on Washers More About Globalization, Not Trade War with China - MacroPolo Tariffs on Washers More About Globalization, Not Trade War with China - MacroPolo
Tariffs on Washers More About Globalization, Not Trade War with China

The Trump administration’s decision to slap tariffs on washing machines and solar panels a couple of weeks ago was widely hailed as the first salvo in a trade war with China. With the US trade deficit in 2017 ballooning to more than half a trillion dollars—the highest in nearly a decade—the political justification for further action targeting large exporters like China will only be reinforced. Yet while the solar panel action is aimed squarely at Chinese manufacturers—and received the most attention on op-ed pages and Twitter threads—the tariff on washing machines actually isn’t really about China.

To the extent that “China” is involved in the washer tariff spat, it is only because it happens to be the main location where South Korean companies have concentrated their washer manufacturing. In fact, the Section 201 action on washers is but the latest chapter in an ongoing play that had been unfolding long before the terms “trade war” and “China” became linked. And such action should be viewed within the context of an administration that has not been shy about its ambivalence, or perhaps even disdain, toward globalized production and multinationals in general, sometimes even when they’re American multinationals. Hence, the levy on washers can be viewed as something of an additional tax retroactively imposed on foreign production to force production back in America.

Indeed, one of the administration’s gripes is multinationals’ ability to engage in “country hopping,” according to the administration’s most vocal trade skeptic Peter Navarro. But this merely identifies the extant reality of labor and capital mobility across borders, in which major multinationals of any country can quickly set up or shift production, often in developing markets with educated labor pools that are competing fiercely to attract foreign capital.

Washing machines—as mundane, old, and ubiquitous as they are—exemplify this highly globalized production. Whereas production was once centered on Western Europe and the United States, washing machines are now made in China, Southeast Asia, Eastern Europe, and Mexico. (Of course, this phenomenon is hardly exclusive to white goods like washers and fridges; it also applies to higher value manufacturers like Boeing, whose Dreamliner 787 supply chain extends from Wichita, Kansas to Linköping, Sweden.)

Yet will the latest tariffs have the intended effect of preventing production base shifts, bolstering a single US company’s prospects (Whirlpool is the complainant in the latest trade action), and sending a wave of manufacturing jobs back to American shores? Neither of these seems likely to materialize.

Let’s take a quick look at why. It is true, as the Section 201 points out, China’s exports of washers to the United States rose substantially from 2012-2015 (see Figure 1). Although those washers carried the “Made in China” label, they were predominantly the South Korean brands Samsung and LG. And this isn’t the first time Korean washers have been targeted, and the Section 201 itself acknowledges as much. In 2013, the Obama administration had also taken punitive action and imposed anti-dumping duties on imported washers. At that time, one of the tariff targets was aimed at Korean washers that originated in Mexico.

Figure 1. US Imports of Washing Machines (in $ million)
Source: BACI International Trade Database.

Yet when that first round of tariffs hit in 2013, exports from Mexico had already dwindled. Now, while the current administration’s new tariff is ostensibly aimed at China, exports from China have already dropped as well, with Vietnam and Thailand starting to pick up the slack. If taken to the logical next step, then the Trump administration will need to target Korean washers originating from Vietnam and Thailand in the next couple years, as Southeast Asia, rather than China, becomes an increasingly important production base for Korean washing machines.

This could go on and on, and playing catch-up can get exhausting—and still not be very effective. Tariffs haven’t stopped the shift in production bases, and have in fact been implemented too late to keep up with global trends both in 2013 and 2018. In addition, in the five years between 2011-2016, the United States did not see a significant reduction of imported washing machines but rather a slight increase. So, in order to prevent “country hopping,” the administration would basically have to be able to predict which country in the future will start making a lot of Korean washers and preemptively slap tariffs on anticipated production that has yet to materialize. If that sounds probably illegal and virtually impossible, that’s because it is.

If the tariffs have been largely ineffective in stemming the flow of imported washers, then perhaps they have helped the single complainant that has been involved in the multiple trade actions in 2013 and 2018—US appliances conglomerate Whirlpool, which also owns Maytag. (Interestingly, the US company itself was making washers in Mexico before it pledged to move production back to Ohio to be exempt from the 2013 tariffs that would’ve been as high as 72%.)

Except that hasn’t really been the case. As Figure 2 shows, there are five major brands of washers in the United States, and Whirlpool and Maytag combined command just under 50% of the total market share. Of course, Samsung and LG’s market shares would’ve been much smaller ten years ago, so perhaps one can surmise that the South Korean brands’ growth came at the expense of Whirlpool.

Figure 2. US Market Dominated by Five Washer Brands
Source: Statista.

But Whirlpool’s overall US market share in home appliances, which includes laundry machines, has actually held steady, averaging about 47% between 2008 and 2016, dipping slightly to 45% in 2015. More specifically, Whirlpool’s net sales of laundry appliances over the same period did not see huge fluctuations, with a slight single-year uptick in 2015 (see Figures 3 & 4).

Figure 3. Whirlpool’s Estimated US Market Share in Appliances (in millions)
Source: Statista.

Figure 4. Overall Demand of Washers Exceeds Whirlpool’s Net Sales
Source: Statista.

Meanwhile, total demand for washers appears to have risen significantly since 2012, which correlates with the pick-up in home sales after the US property market bottomed out in 2011 (see Figure 5). It seems that Whirlpool was not capturing much of that additional demand in washers, presumably because its competitors, including the South Korean brands, were also riding the US demand rebound.

Figure 5. US Housing Market Rebound Since 2011 (in thousands)
Source: US Census Bureau.

If the tariffs’ effect on Whirlpool’s performance had been negligible, then surely the fact that Samsung in early 2018 began operation of a laundry appliances plant in South Carolina is a victory for this kind of trade pressure, right? While Samsung’s commitment of hiring 1,000 workers by 2020, if fully honored, can certainly benefit the local community in which it plans to hire workers, it is too early to tell whether such commitment will last.

If Samsung can shift some of its production into the United States, it can just as easily shift it out at its choosing at the allure of better incentives in other markets. And that’s exactly what the Swedish appliance maker Electrolux (known to most as the Frigidaire brand) did in the mid-2000s, when it closed down its washer plant in Iowa that the company had maintained for decades and moved production to Juarez, Mexico (Eletrolux is also facing preliminary tariffs on its washing machines from Mexico and intends to challenge them). Like Samsung, Electrolux had initially shifted its supply chain from Germany to Eastern Europe but then became more global, even maintaining a plant in Tennessee.

Global production bases and supply chains are complicated and dynamic, and multinational companies tend to be highly mobile with where they invest. Amid today’s globalized and integrated production networks, tariffs are a blunt instrument that are better at scoring near-term political points than they are at serving as an effective tool to revive domestic manufacturing. While today’s tariffs are about Korean washers, in a few years, their focus could well be Chinese fridges (China’s Haier already owns GE appliances, which manufactures many of its fridges in Mexico—I should know, as I just bought one). Using tariffs as a retroactive tax to roll back globalized production and pressure companies to manufacture in the United States is at best unsustainable and at worst an exercise in futility.

That is not to say that a withering manufacturing base in an economy is desirable. There have been compelling arguments made about the loss of innovation and embedded knowledge that result from a vitiated manufacturing sector in an economy. In other words, producers in an economy not only produce goods, but also generate process innovation and other knowledge spill-overs into the broader economy.

Few will dispute that keeping innovation in the United States is a good thing. But America already knows how to make a really good washing machine, and using tariffs to support one company’s market share does not seem particularly sensible, nor does it incentivize innovation that results from open competition. A more comprehensive and thoughtful policy would be better served to incentivize cutting-edge manufacturing industries of tomorrow rather than rely narrowly on tariffs as a mere shield to protect legacy industries of the past.