insight magazine

Illinois Gets Caught in the Crosshairs

Tariffs, aimed at protecting American businesses, are instead likely to hit the Illinois economy. By KRISTINE BLENKHORN RODRIGUEZ | Fall 2018

Crosshairs-800

Home to roughly three dozen Fortune 500 companies and the fifth highest GDP in the nation, and ranked fifth nationally for both exports and imports, the economic health of Illinois plays heavily into the economic health of the country. Economic growth then, unsurprisingly, is top of mind for the Illinois Department of Commerce & Economic Opportunity, which has targeted six areas for driving Illinois’ growth: advanced manufacturing, agribusiness & food processing, transportation distribution and logistics, life sciences & biotechnology, business & professional services, and energy.

Cross-reference that list with the product tariffs the current U.S. administration is proposing, however, and you’ll see a disconnect. The U.S. Chamber of Commerce warns that nearly $4 billion worth of Illinois exports are threatened by new tariffs.

From soybeans to passenger vehicles, Illinois’ big industries and exports are squarely in the middle of the global tariff brouhaha we’ve been plunged into.

With costs creeping higher from the tariffs imposed so far, it’s no surprise that many Illinois companies are feeling the squeeze, while many others fear consumers and customers won’t be able to sustain the buying volume necessary to keep Illinois’ economy growing. Add in the fact that more than 5,600 foreign-owned businesses operate throughout Illinois and the impact of tariffs and trade wars becomes all the direr.

TARIFFS TODAY

Laura Ortega Lamela, executive director of the International Business Council at the Illinois Chamber of Commerce, says Illinois exported goods worth $64.9 billion in 2017: “Our top markets are Canada, Mexico, China, and Germany — all countries with whom we are currently engaged in trade negotiation squabbles. What Illinois companies want is the ability to increase their commercial relationships with these countries — tariffs hinder that. Free trade agreements are great examples of the value that building key economic partnerships brings to our state. Illinois’ free trade agreement partner countries represent 53 percent of Illinois’ total exports and they purchase 16.6 percent more goods than non-free trade agreement countries. The United States has free trade agreements in force with only 20 countries.”

Manor Tool and Manufacturing Company, a specialized metal stamping company in Schiller Park, Ill., is feeling the tariff impact in the here and now. “Our raw materials are up 30 to 35 percent this year already,” says President Tom Simeone, who’s also a member of the Illinois Chamber of Commerce Manufacturing Committee. “We were seeing increases in our costs even before the tariffs took effect in anticipation of them.”

Despite the increasing costs, Simeone says he sees the logic in tariffs: “After 35 years of seeing the amount of business we’ve lost to overseas competition, sometimes you just get fed up with it. Two domestic competitors in a materials-intensive business will both have the same cost problems. That, at least, is a fair fight. Add one overseas competitor to the mix, and the domestic guys struggle at a disadvantage.”

Tariffs are supposed to level the playing field, but with any new or increased tariff — particularly retaliatory tariffs — and any failed free trade agreement, Illinois businesses face rising risks of an economic hit. The Chicago area is home to three of Bluewater Thermal Solutions’ plants, where it commercially heats and tempers ferrous metals. Its customers span the agriculture, auto, manufacturing, and oil and gas industries.

“Roughly 70 percent of our business is in agricultural and automotive equipment/components work — two staples in Illinois’ economy. Tariffs on these raw materials and products concern me because it all flows downhill,” says Rich Shapiro, general manager of Bluewater Thermal Solutions’ Chicago 1 plant. “I’ve seen estimates that the average farmer’s income could go down 7.3 percent. If farmers’ income goes down, they don’t buy new equipment. If they don’t buy new equipment, big Illinois companies like John Deere and Caterpillar may cut back on orders to our customers, which could mean less product for us to heat treat. And it’s the same on the auto side. If the price of a car goes up because of tariffs, people will repair instead of replace. If they’re not buying new, we’re not heat-treating components for new cars,” Shapiro explains.

Those on the frontline of the agriculture industry are especially concerned. The Trump administration proposed some $12 billion in aid for farmers hurt by tariffs, but here in Illinois, farm incomes have already been hurting — tariffs are just another blow.

“Farmers in the state are in their fifth consecutive year of declining income,” warns Tamara Nelsen, Illinois Farmers Bureau senior director of commodities. “Because there has been little weather loss and superior genetics in corn and soybeans over the past four years, Illinois farmers are facing huge stockpiles. Toss in the uncertainty over tariffs and prices go down.”

“We’re in a loss scenario. Add tariffs on top of it and it becomes a truly serious situation,” says Robert Klemm, a farmer of 43 years and Illinois Farm Bureau board member. Klemm says he has watched corn and bean prices decline some 20 percent since President Trump started talking tough on tariffs in May.

Klemm’s son helps him work his 1,200-acre farm located between Bloomington and Decatur. “He is the fifth generation to farm the land; I’d like to see that continue,” Klemm says. “We need trade, not tariffs. We know the implications of the trade imbalance. But right now, agriculture is being singled out as a pawn. With the swipe of a pen, everything we’ve built for decades can be decimated.”

Making matters worse, the banks are “getting edgy,” Klemm adds. “They’re concerned. Farmers require an extensive amount of capital and financing. Banks are starting to question their lending. If something new doesn’t come into play for us — and tariffs move ahead full steam — well, it’s disheartening. A lot of good people have their livelihood at risk.”

BALANCING ACT

“The situation is unprecedented,” says Joseph Cheng, Ph.D., research professor of innovation and international business in the Gies College of Business at the University of Illinois Urbana-Champaign. “The closest I can remember happened from 2009 through 2011. The U.S. and Mexico were disputing over NAFTA [North American Free Trade Agreement]. The Mexican government placed tariffs on $2.4 billion worth of goods shipped from the U.S. to Mexico. For Illinois, that meant everything from agricultural products to tableware. The U.S. lost more than 25,000 jobs in that trade war.”

“Tariffs are kind of a way of life right now,” says Illinois General Assembly Rep. William Davis. “A delicate balance exists in both directions. When you start talking about increases, you start to upset that delicate balance. As a country and a state, we rely on the influx of goods and services, just as we rely on being able to push them out to other countries. It’s not just industry in Illinois that will be impacted, but also our farming community — combined, that’s a huge impact on our state’s economy.”

Davis represents the 30th District in Chicago’s south suburbs, a district in which industry is prevalent. “We have assembly plants — Ford is in the south suburbs. Illinois has a Chrysler plant. Steel production is an important part of our local economy. Those are important jobs we’d like to keep,” Davis says.

“How do we then balance that against something else? Do we say steel is more important than agriculture?” Davis asks. “That doesn’t seem right, but neither does the reverse. Again, if you’re shifting a delicate balance, you must do it mindfully. Some of the proposed trade changes appear arbitrary.”

Cheng sees the tariffs as protectionist measures that look back, not ahead. “Our state’s mix of industries is changing. We should be looking forward and identifying the growth industries of the future rather than focusing on industries that are declining. Just as we moved from agriculture to industry in the Industrial Revolution, we must now move from traditional industries to emerging ones using next-generation technologies,” he argues.

Davis, like Cheng, also believes Illinois should be looking to future sources of revenue. “Today, I’m in a discussion with ComEd about growing solar industries in Illinois and expanding trade opportunities that currently exist to grow another sector of our state economy. We can’t keep relying on the same sectors to do it for us, economically.”

FUTURE-FOCUSED?

“Old jobs will not come back,” says Cheng. “But old jobs do not make us competitive. And old jobs don’t create a future. Only new jobs do. We have not trained our local workforces to transition from old jobs to new jobs.”

A new statewide innovation enterprise led by the University of Illinois System may be the key to those new jobs. The $1.2 billion statewide Illinois Innovation Network (IIN) and its primary hub, the Discovery Partners Institute (DPI), are being developed to accelerate innovation, job creation, and economic growth throughout Illinois. The initiative got a major boost when $500 million in funding was approved in the state’s FY 2019 budget.

State funding will go toward design and construction of DPI’s facility in Chicago (currently slated for a site along the Chicago River), which will be home to world-class research and hands-on educational training for students, as well as to hubs of the IIN stretching across the state.

The new institute will bring together top faculty in agriculture, healthcare, computing, and other critical fields from the U of I System and partner universities, including the University of Chicago and Northwestern University. Dozens of new researchers also will be added and together they will connect with hundreds of businesses and thousands of students over time, as well as with entrepreneurs and venture capital firms.

“We have to be the first mover in emerging industries — there’s an advantage in that,” says Cheng, who currently serves as a member of the DPI launch team. “The DPI project is focused exclusively on the next-gen technologies that create new industries and new jobs. Our economy’s health depends on it.”

LOOKING AHEAD

For now, Illinois is far more reliant on foreign trade than many states, says Adam Nielsen, director of national legislation & policy development for the Illinois Farm Bureau: “We are served very well by our rivers system. We have direct access to the Gulf of Mexico. We are centrally located. We’re a hub for trade.”

On the agricultural front, Nelsen sees more trouble ahead. “If we’re still fighting on numerous fronts in 2019, a lot more of our Illinois farmers will be in trouble,” she worries. “They know China will be a longer haul. But China matters in a very big way.” That said, Nelsen hopes for progress with Canada and Mexico, and a bilateral trade agreement with Japan, which would give Illinois farmers some assurance that they’ll be ok.

Klemm is focused on the here and now. “We have to worry about paying off this year’s operating loan to be able to put a crop in next year. You’ve got to make it through today to even get to the long term.”

As for business leaders like Shapiro and Simeone, worries about the state’s overall economic health are sure to linger. “I’m concerned in the longer term,” Simeone says. “I guess all I can do is be as competitive in manufacturing as I can be.”

The full trickle-down impact from tariffs and escalating trade wars is yet to come in any real sense, yet many Illinois workers, farmers, and business leaders are already beginning to feel it in an all-too-real way. There is a lot at stake for Illinois, much more than meets the eye.