How the Trade War Hurts American Manufacturers

Many believe that China's lower labor costs and sometimes unfair business practices are to blame for fewer manufacturers and manufacturing jobs in the United States. Therefore, the China trade war must be a good thing that should ultimately bring more manufacturing back home, right?

"This is a fallacy," says Bill Courtney, President and Founder of Classic American Hardwoods. He is not surprised that The Institute for Supply Management purchasing manager index—a widely viewed gauge of U.S. manufacturing activity—has declined four straight months. You may recognize Bill Courtney as the celebrated volunteer coach who turned around inner city high school football team Manassas High in the Oscar-award winning documentary Undefeated.

His company employs 150 people with a 45 acre manufacturing facility and domestic sales offices in Memphis, TN and international sales offices in Shanghai, China and Ho Chi Minh City, Vietnam.

In a recent Inspired Money interview, Coach Bill spoke frankly about how the trade war is negatively impacting his company and the American manufacturing sector. The following are quotes from the interview, edited for readability and comprehension.

Worse Than The Great Recession

It's exponentially worse than the Great Recession. 2008 and 2009, the great recession was bad and obviously when you're in the lumber business, and people aren't building, you've got issues.

My lumber is hardwood lumber. People think about lumber, they think about two by fours and four by sixes and stuff that build a structure. Hardwood lumber is oak, cherry ash, maple. It's the things that furnish a building. Think of it this way, softwoods build a structure and hardwoods furnish it so my stuff is what makes flooring, cabinets, doors, moldings, furniture, and all that.

But still, if you're not building houses, you're not furnishing them. The great recession was awful, and it's when I started exporting, because there was business that you could develop for our products in Europe and Asia, really all over the world competing with South American species, African species, Russian species, and European species. I had an out, which was you got to change your species mix, you got to be creative, you got to spend a lot of money traveling, you got to set up offices overseas, but there was a market to help buttress the loss of everything that the Great Recession had.

Contraction is Inevitable

This is all politically driven. How do you plan five months ahead, a year ahead? How do you plan when you have no idea what side of the bed the President and the people in China are going to wake up on this thing?

The reason it's exponentially worse is there's no out, so the only answer is to contract. You know, I consider business a three-legged stool. Each leg is sales, expenses, margins. If you sell enough and the margin is high enough, that cover your expenses, you're going to make money. But if any of those three legs falls off, the stool falls over and you're done.

42% of all the hardwood lumber made in the United States went to China over the last five-year period. We've lost that. If your sales go away, 30% of your sales evaporate overnight, because a bunch of politicians decided they want to get into an argument and use common folks like us as pawns.

There's really nothing you can do about it. There's no market driven exercise or creativity you can do to offset it. The sales are gone. Can I increase my margins? Well, no, because now there's a 30% contraction in the marketplace, but there's still the same level of production.

Actually, now your margins are shrinking as well. The only place you can cut is expenses--that's people, insurance, and everything. The problem is there's no sales or margin or creative out as a result of what the trade wars have done to not only my business, but largely most manufacturing in the United States.

No Bailouts

We're not farmers so there's no $8 billion bailouts for us. By and large, unless you're Apple or Nike who have somehow been carved out of the retaliatory tariffs, all of us mid-cap, mid-sized manufacturers spread all over the middle half of the United States are just absolutely getting pummeled.

It's scary! 19 hardwood lumber mills in the United States have shuttered and gone bankrupt in the last 90 days alone. It's terrible.

Losing Global Market Share

And one other thing to note for your listeners, there's a misnomer. 20 years ago, 83% of the of the lumber sent to China was made into products that were then exported out of China. It could be argued that 20 years ago, China was buying our raw materials, making products, and then putting the American worker out of business with the advent of really cheap freight, and certainly their cheap labor. They could actually take our lumber, make products, and ship them back to United States and sell them cheaper than a furniture manufacturer in the United States could.

And so there was an argument 20 years ago that you could say that China's explosion in manufacturing was a detriment to American manufacturing and the worker, but in the last five years, China's economy has grown and the middle class has grown so that 85% of all the lumber sent to China is manufactured, made into products that are consumed by the Chinese public.

The idea that if we don't ship stuff to China, more people will build factories in the United States and you'll replace the sales in the United States. That's just wrong. That's the narrative that's coming out of DC; but that's just a lie, because China has its own economy now and its own marketplace. When we're locked out of doing business in China, we're locked out of that marketplace and there's no replacement for those people and for that business, and therefore, your business and your industry contracts. That's what's happening in my business and many other American manufacturers because they're locked out of it.

And if the void is being replaced by South American manufacturers, Russian manufacturers, European manufacturers, African manufacturers, so it's not like China just says, "Okay, well, we're not going to buy these products anymore." They just go to other markets that don't have tariffs. And therefore, American manufacturing is losing actual market share, that once those supply chains are replaced, I don't know if they'll ever come back.

It's a profound effect on American manufacturing. And I think just recently, American manufacturing numbers came out about three weeks ago and they were way, way, way down and people were surprised and I'm like, why are you surprised? We're locked out of a third of the world's economy!

Tariffs Are Hurting China but at What Cost?

Now, the tariffs are having a profound effect on the Chinese economy. The Chinese economy is absolutely in the tank, and I don't care what their government and their government run press says about their growth and their GDP. They are most certainly in a recession right now.

If the effect of the tariffs was to cripple the Chinese economy to bring them to the bargaining table, to right some unfair practices that have been going on, well, that works.

The question is then, “Is the collateral damage to the American manufacturing sector, which is happening with the loss of jobs and the loss of revenue in that sector, worth what you're gaining in China?” For me, because it's me personally, I'm in it. I'm starting to question it, obviously, because I can't make any money and I'm laying people off.

For an average American who's not manufacturing, you really have to ask yourself, "We lost the furniture industry. We lost the textile industry. And here's yet another blue collar mid-American industry whose companies are all in these small Midwest towns, many of which when the textile plant left, the schools suffered, the shops closed down, the city, the little town square went away, and they now have meth problems. I mean, because there's no jobs and there's no opportunity in these areas, people are leaving them.

Is it worth a whole other industry that props up towns like that all over, all over the middle of our country, is it worth losing more and more and more of that kind of industry in America to put China on its ass or not? Because that is the collateral damage that's occurring as we speak.

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Have you seen the documentary "Undefeated?" What do you think of Coach Bill Courtney's business and the impact of the trade war?