Part of an ongoing series that looks at changes one year after the global trade wars ignited.
In June 2017, Cambridge, Ont.-based Canadian General-Tower Ltd. had seemingly landed on the right side of U.S. President Donald Trump’s “America First” trade war.
Craig Richardson, the affable chief executive of CGT — which supplies coated fabrics to the North American auto industry — had just held a ribbon-cutting ceremony for the company’s new $90-million factory in New Braunfels, Texas, a small city of 85,000 residents northeast of San Antonio.
The factory was a major investment decision for CGT, one made long before the waves of fire engine red “Make America Great Again” caps started surfacing at political rallies and well ahead of Trump’s inauguration speech bemoaning the “American carnage” of lost manufacturing jobs and “rusted out factories scattered like tombstones” across the country.
It’s a daily barrage of issues and it’s kind of overwhelming
CGT CEO Craig Richardson
Indeed, CGT’s choice to build its first U.S. factory in New Braunfels had less to do with politics than with what the city had to offer: a 27-acre parcel of land with room for growth, an attractive package of state and local tax incentives and, most importantly, a production base just three hours from the El Paso and Laredo border crossings to Mexico, where the vast majority of automotive seat and panel manufacturers are based.
“We answered, I’m going to say unintentionally, that call to repatriate jobs back to America, produce the product in America,” Richardson said. “That was probably more luck than good design.”
The good fortune wouldn’t last. As Washington’s trade war with Beijing heated up, the New Braunfels’ operation was sideswiped by U.S. tariffs on fabric backing, a key raw material imported from Chinese manufacturers. Next, CGT’s factory in Changshu, China, which supplies automakers in that country, was forced to grapple with a deep slump in demand due to an economy partly pulled down by U.S. tariffs.
Then, in a blow delivered just hours before Richardson sat down with the Financial Post for an interview in May, Trump announced plans to slap levies on all Mexican imports, unless Mexico curbed the flow of migrants over the border.
For CGT, whose product is eventually shipped back over the border into the U.S. as part of finished seats to be assembled at American auto plants, the announcement hit like a lightening bolt.
“This morning, a very excited chief financial officer came into this office saying, ‘We have a serious problem here. This is going to have a profound effect on our cost structure,’” Richardson said, sitting behind a meeting table at his bright Cambridge headquarters. “I can’t even say what ‘profound’ means yet. I just know this will have a major impact on a business like ours that thought it was doing all the right things.”
One year after the U.S. kick-started the trade wars by slapping national security tariffs on steel and aluminum imports, Canadian businesses like CGT continue to be entangled in a global web of trade offensives and retaliations that complicate supply chain management, dampen investment and tie up resources that might otherwise have been put toward business growth.
That struggle is playing out in different ways across various industries and has carried on despite the removal of some direct headwinds: the steel tariffs were scrapped in May and, after 17 months of rocky negotiations, a new North American Free Trade Agreement has been signed, if not ratified.
In the agricultural sector, the challenges might include commodity prices driven down by Trump’s trade war with Beijing, or piles of stock left unsold due to direct Chinese restrictions on Canadian goods such as canola and pork. For first-time exporters, a lack of certainty may deter them from taking the leap into new markets. And many manufacturers have to deal with the ongoing drain on resources that comes from shifting supply chains and purchasing strategies in order to avoid tariffs that may or may not be permanent.
The morning after Trump’s Mexico announcement in May, CGT contacted its lawyers at Deloitte Canada, who warned that they wouldn’t be able to advise until they got a handle on the surprise announcement themselves.
Richardson also made plans to spend a good part of his afternoon huddled in a hastily arranged meeting of CGT’s logistics and procurement group, strategizing about how to handle suppliers and customers, how to absorb the cost of the levy and whether it could be passed on — all for a tariff threat that was ultimately dropped.
“It’s a daily barrage of issues and it’s kind of overwhelming, not only for business leaders, but for all folks in the manufacturing sector,” Richardson said. “These things are just launched on the business community and we have to react.”
A supporter of U.S. President Donald Trump holds a Make America Great Again Hat over his heart during a rally near the White House in July.
Responding to trade policy is now the full-time concern for CGT’s China-based procurement group, he added, “and we can’t be any different than any other manufacturer right now, because whether you make appliances, clothing or something else, you have to be responding to this in a way that takes your eyes off business success. It’s a little bit of a survival tactic right now.”
Surviving means taking a different approach to navigating the furious crossfire of tariffs that ricochet through established business operations and often come without warning.
The resulting business environment is “chaotic,” said Sabrina Qu, CGT’s vice-president of global procurement, in an email. “The uncertainty of the issue forces more short-term decisions than long-term (ones).”
Though 31 per cent of business leaders were optimistic about Canada’s business prospects in the second quarter — up from 22 per cent in the first quarter — U.S. protectionism was their top concern (in Q1 it was Canada’s economy), according to a survey of 378 individuals by Chartered Professional Accountants of Canada.
And though the move to more restrictive trade may have begun in the U.S., the trend has since spilled well beyond its borders.
Uncertainty is what Trump has created, more than anything else
Prof. Robert Wolfe
After a decade of stability following the financial crisis, there was a “dramatic spike” in the past year in the size and scale of restrictive trade policies among G20 nations, noted a recent World Trade Organization report.
New trade-restrictive measures affected goods worth $335.9 billion between October 2018 and May 2019, the second-highest figure recorded since the WTO began tracking it in May 2012. The highest figure on record came during the previous period from mid-May to mid-October 2018, when new trade restrictions hit $480.9 billion in goods.
The consequences of these new barriers: Increased uncertainty, lower investment and weaker trade growth, the organization warned.
“Uncertainty is what Trump has created, more than anything else,” said Robert Wolfe, a professor emeritus at Queen’s University in Kingston, Ont., who has studied trade policy for decades. “He likes people being off balance and we know there is a solid body of economic research that shows uncertainty is really hard for firms, has a big effect on trade and is really disruptive.”
Though business investment in machinery and equipment jumped 8.7 per cent in Canada during the first quarter, that followed three consecutive quarters of declines and was offset by a fall in exports.
Doug Porter, chief economist at BMO Capital Markets, said the ongoing battle between Canada’s two largest trading partners will continue to play a factor in investment decisions.
“I think it was late last year that Canadian companies went from having to deal with NAFTA negotiations and tariffs to the heavyweight fight between the U.S. and China,” he said. “In general, there’s a reluctance to spend a lot on bricks and mortar when there is so much technological disruption going on, but the trade issues have certainly weighed on top of that.”
Few companies would seem better suited to navigate the current tariff war than CGT, a 150-year-old company that credits international trade for much of its success.
CGT’s plant in Texas.
CGT began as an exporter of wagon wheels and axe handles, before reinventing itself as a manufacturer of rubber raincoats and shower curtains during the first half of the century, a supplier of pool liners in the late 1960s and, finally, a maker of the “polymeric film” used on modern car seat coverings and instrument panels in the 1990s.
Owned by the Cambridge-based Chaplin family for five generations, CGT was sold in 2012 to private investment firm Holcan Investments and now churns out 60 million yards of polymeric film each year.
“Except for a few family breweries, it’s rare to find a business that endured all that time and survived,” Richardson said. “And much of that success came through exporting. We’ve endured a lot of obstacles and I have to think this is just another.”
Yet the current trade wars have placed a set of strains on the company that are both unprecedented and unpredictable.
For instance, after beginning at “a minimal level,” the U.S. tariff on the Chinese fabric backing used in virtually every CGT auto product rose to 25 per cent, Richardson said. That increase prompted the company to seek a local supplier for its Texas plant and, due to fears of more potential surprise tariffs, build a strategy that regionalizes the supply chains for its China and Cambridge operations.
“It’s forced us to have a global strategy on procurement,” Richardson said. “By that I mean, just because you signed a significant purchasing agreement with a supplier in China for a particular part doesn’t mean you don’t also need a local supplier for that part.”
Such decisions are all part of a global shift toward regionalization, one that Trump’s tariff wars may have hastened, but didn’t start, say researchers at the McKinsey Global Institute. Its study of 23 industries in 43 countries between 1995 and 2017 noted that value chains are increasingly morphing to regional models as companies shift priorities away from cheap labour and toward automation, research and development and maximizing the speed at which their products reach consumers.
Workers at CGT’s plant in Texas.
That shift can be traced back to the mid-2000s when goods traded across borders as a share of gross output began to shrink even as output and trade continued to grow in absolute terms.
Nevertheless, reshaping supply chains even partly in response to temporary trade tensions can leave lasting inefficiencies, said Wolfe at Queen’s University, because if the modified system starts working “well enough,” companies may be reluctant to shift back once the tariffs are gone, at least in the medium term.
“It’s one reason some of the effects of the uncertainty Trump has created will last for years,” he said. “The other effect is that just as firms can’t believe a word he says, neither can trading partners and other governments. Even if you have a new president take office in January 2021 who seems rock solid and sensible, how long is it going to take before people feel comfortable that there’s not going to be another Trump?”
What makes Trump’s duties particularly unsettling is not their size — current U.S. average tariff rates of 5.7 per cent on dutiable imports fall well below previous eras, said Doug Irwin, a trade historian at Dartmouth College — but how they are being used.
Previous presidents opting to protect certain industries most often did so in the context of a recession or import surge, Irwin said.
“With this administration, we’re at full employment, the economy is purring along, not many industries are complaining about imports, they are relatively stable as a share of GDP, and yet we’re seeing wide use of trade instruments and threats of trade tariffs,” he said. “The position of previous presidents was to let sleeping dogs lie. If no one is complaining about it, don’t do anything about it. That’s what makes this situation unique.”
At the root of the problem, Irwin believes, is a trade policy driven by geopolitics rather than economics, which creates a kind of instability that dwarfs even the effects of the Smoot-Hawley Tariff Act in the 1930s. That act — generally believed to have exacerbated the Great Depression — may have boosted average levies on dutiable goods to almost 60 per cent, but it at least provided businesses with some clarity.
“Once Congress passed that Smoot-Hawley law, that was the new law, so it was a much more certain process in some senses,” Irwin said. “It wasn’t economically wise, but it was more certain. Whereas now, it could be automobile tariffs next, threats against Mexico for immigration, more tariffs on China, we don’t really know. And the main risk is that firms are going to hold off on investment.”
The longer trade skirmishes go on, the more damage will be done, leading some to wonder whether the current shifts are part of a permanent change in the international order of trade.
Wolfe, for one, expects the current changes to be more temporary, likening them to “bad weather” rather than “climate change.” China is too entrenched in the global trading system to simply be cut out of it, he said, and a new U.S. president could undo many of the trade policies that have been imposed in the past few years.
“We shouldn’t put too much emphasis on it from a long-term systemic standpoint,” he said. “But for individual firms, this is a big short-term deal. They don’t deal in the long term, they don’t even deal in the medium term. They’ve got a payroll and bills to pay, orders to fill and everything is being disrupted.”
Back at CGT headquarters, Richardson has no regrets about building the Texas plant, where a second shift was subsequently added to accommodate demand. Nor has he had second thoughts about the $80 million invested in CGT’s Changshu plant in 2012, or the $22 million it has spent upgrading the Cambridge facility.
“But all of that occurred prior to these trade wars,” he said. “If we were pondering those decisions now, I’d tell you, absolutely, the materiality of what’s happening is huge. We just would not make those decisions until we could see our way through.”
• Email: npowell@nationalpost.com | Twitter: naomi_powell
