Baker Institute expert available to comment on Texas’ manufacturing outlook, impact of tariffs

Jeff Falk
713-348-6775
jfalk@rice.edu

Baker Institute expert available to comment on Texas’ manufacturing outlook, impact of tariffs

HOUSTON – (March 27, 2018) – Recent drops in indexes measuring manufacturing activity in Texas are “extreme,” according to an expert at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

Ed Egan, fellow of the Baker Institute and director of the institute’s McNair Center for Entrepreneurship and Innovation, is available to comment on this development and the role President Donald Trump’s tariff policies are playing.

According to the Dallas Federal Reserve’s monthly Texas Manufacturing Outlook Survey, activity at Texas factories continued to expand in March, “albeit at a markedly slower pace than last month.”

The Dallas Fed reported that “the production index, a key measure of state manufacturing conditions, fell 15 points to 12.7 (the sixth biggest drop since 2004), signaling a deceleration in output growth.  … Other indexes of manufacturing activity also remained positive but posted double-digit declines in March.”

Although Egan stressed that the outlook for Texas’ manufacturing does remain positive, he said, “If there are comparable drops next month, the outlook will turn negative. With further losses from there, we could be looking at an industry-specific recession and the potential loss of thousands of jobs.”

The Fed report included sample comments grouped by subsectors. Six of the 10 subsectors that make up Texas’ manufacturing industry, including the three biggest subsectors, focused almost exclusively on steel and aluminum tariffs as the cause of their concern.

Egan said there are three main ways that the Trump administration’s steel and aluminum tariffs affect the U.S. economy: by stimulating smelting (applying heat to ore to melt out a base metal), by raising the cost of inputs to downstream firms and through trade-war exchanges. He explained that even before any trade-war consequences, the tariffs are likely to have a negative effect on the economy as U.S. smelting is very small relative to manufacturing, construction and other sectors that use steel and aluminum as inputs.

“This policy almost surely wouldn’t pass a cost-benefit analysis,” Egan said. “It’s also just not the right direction for the U.S. economy – we have been transitioning into the innovation economy since 1980 and the driving force for U.S. economy growth is now high-technology, not raw material production. It’s very unusual to see a U.S. president place sanctions on domestic firms on U.S. soil. Sanctions are a costly way to bring other nations to the bargaining table; using them on domestic industry goes against mainstream economics and more than 20 years of U.S. policy.”

Egan pointed out that smelting is energy-intensive and that this would be good for Texas, which is the U.S.’ leading oil and gas state. However, he also said that these gains would be more than outweighed by the impact on Texas’ manufacturing sector, even before any reciprocal trade actions. Texas leads the U.S. with more than $250 billion per year in exports and so is particularly susceptible to tit-for-tat responses from other nations.

Egan cited the new Tenaris Bay City plant as a local example of the problem for Texas. The Tenaris Bay City plant was opened in December, having received tens of millions of dollars of state and local government subsidies. It’s a $1.8 billion state-of-the-art pipe manufacturing plant and will employ around 600 workers at full capacity.

“It’s located in Bay City so that Tenaris can ship in raw materials from abroad at international market prices and then have a low transport cost for pipe and other products to the Permian Basin,” Egan said. The plant’s opening was delayed two years, due to the price of oil. “With this large potential hike in their input prices, it’s no longer clear whether plants like Tenaris Bay City will be economically viable,” Egan said.

“Long-term trends of decreasing operating margins have forced greater automation in the manufacturing sector, which in turn has led to more capital intensive projects and increased productivity per worker,” Egan said. He pointed out that these factors have particularly affected small- to medium-sized manufacturing enterprises, as well as entrepreneurship in manufacturing. “It is already hard to start up or survive without economies of scale in manufacturing and raising input costs will only make this worse,” Egan said. “Ultimately, these tariffs are likely to reduce competition in U.S. manufacturing, so U.S. consumers will face even higher prices than the simple input cost increases might suggest.”

The McNair Center was founded in 2015 as the research-oriented cornerstone of a larger, nationwide consortium of Robert and Janice McNair Foundation-funded centers devoted to entrepreneurship education. The center develops and distributes data and conducts policy research to better understand and promote entrepreneurship and innovation. It also provides a forum for stakeholders throughout the entrepreneurial ecosystem to debate ideas, share understanding and effect change.

The Baker Institute has a radio and television studio available for media who want to schedule an interview with Egan. For more information, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

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Follow the Baker Institute McNair Center for Entrepreneurship and Innovation via Twitter @BakerMcNair.

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Related materials:

Egan biography: www.bakerinstitute.org/experts/edward-j-egan.

Baker Institute McNair Center for Entrepreneurship and Innovation: www.bakerinstitute.org/mcnair-center-for-entrepreneurship-and-innovation.

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.