Trump Tariffs Push Manufacturers to Consider Production Outside U.S.

(Bloomberg) -- The Institute for Supply Management's July survey is flashing a disturbing signal: While manufacturers are experiencing healthy demand in the U.S., they're considering expanding outside the country to avoid tariffs in a widening trade war.

“Uncertainty is the biggest enemy of business,” and escalating tariffs on more and more products are causing “concern about where to invest and how much,” Timothy Fiore, chairman of the ISM manufacturing survey, said on a conference call with reporters Wednesday. The group reported that U.S. manufacturing cooled in July by more than projected, with a gauge of new orders falling to the lowest level in more than a year.

“We're seeing a lot of comments from the respondents about evaluating whether to manufacture something in the U.S. or make it in Canada or make it in Mexico,” Fiore said. “If the end market is Europe or China,” then “you're going to want to move it outside the U.S. at this point,” he said.

Such sentiment may weigh on business investment, which contributed last quarter to the fastest pace of economic growth since 2014.

When the Tempe, Arizona-based ISM started tracking respondents' feedback on trade concerns back in March, about 32 percent of the general comments were related to tariffs, Fiore said. That climbed to 38 percent in June -- when tariffs on imported steel and aluminum widened to more countries -- and the share surged to 49 percent in July, as levies on $34 billion on Chinese goods were implemented.

“That's got to put a chill in people,” Fiore said. “Management teams just really aren't sure what to do.”

To be sure, growth at factories is nowhere near a collapse, as ISM indexes showed production, orders and employment still expanding at a healthy pace. The comments from survey participants, however, underscore their concerns surrounding sales forecasts, where to purchase parts and materials, and whether to invest outside the U.S., in addition to whether to increase capital spending or adopt a wait-and-see approach, he said.

“I don't believe that true demand has gone away, but there's definitely an element of uncertainty as to what to build where,” Fiore said. “I don't think the expansion plans are being shelved. The decision process right now is, where's the best place to make that, given the fact that we have such an uncertain environment here driven by an effort to re-balance the current state of trade.”

Economists watching the data also are highlighting how manufacturing sentiment is starting to slip as tariffs scare businesses. The ISM gauge will probably retreat if the Trump administration follows through with proposed tariffs on $200 billion of additional Chinese imports, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note after the July data.

“Dumb policy hurts,” Shepherdson wrote.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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