“In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries”: Chairman-designate of the Council of Economic Advisers.
By Wolf Richter for WOLF STREET.
The proposals by the incoming Trump administrations to levy new and additional tariffs against China, Canada, Mexico, the EU, etc. have unleashed a torrent of anti-tariff nonsense in the media, pushed by globalization-mongers, by Corporate America perennially in search of cheap labor, and by foreign countries that have been riding this big US gravy train.
Now some of the top appointees-designate of the next Trump administration have pushed back against this anti-tariff nonsense, including Chairman-designate of the Council of Economic Advisers Stephen Miran, who said, “In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries.” And we’ll get to them in a moment.
The result of this “one-sided free-trade policy” over the decades has been the gigantic and ballooning US trade deficit (exports minus imports). Exports add to GDP, imports subtract from GDP, and the trade deficit has been a huge drag on GDP, in addition to causing all kinds of other issues, such as the strategically risky dependence of the US supply chains, and thereby the economy, on Chinese companies, many of them state-controlled. The chart shows the inflation-adjusted trade deficit that is part of the quarterly GDP calculation – the amounts in annual rates being subtracted from GDP.
First some basics about tariffs.
1. Tariffs have two roles: raising taxes (which the US desperately needs); and changing the economic math for domestic production.
2. US “trading partners” have used tariffs extensively to protect and support their own industries at the expense of US production and exports.
3. Tariffs are applied to the cost for the importer. If a big US retailer buys T-shirts by container loads from a factory in Bangladesh that it intends to retail in the US for $9.99 each, and if the tariff on this product is 25%, the importer (the retailer) is going to have to pay 25% in taxes on the cost from the factory. If the factory charges $1 per T-shirt, the tariff amounts to 25 cents.
4. Tariffs are a direct tax on the profit margins of foreign producers and US importers. Whether or not they can charge more for their products without gutting their sales to pass on the tariffs is decided by the market. And if they can pass on a portion or all of the tariffs, it would be a one-time bump.
5. Companies are already charging the maximum amount they can and still obtain their sales goals. If they raise prices to pass on the tariffs, sales may fall. Whether or not the retailer can raise the price of the T-shirt to $10.24 without pulling the rug out from under the desired sales volume is decided by the market, not by the retailer, and the retailer may find that it has to eat the tariffs.
6. US importers may negotiate the purchase price to where the foreign factory eats part of the tariff, in which case foreign producers pay the taxes to the US government.
7. Domestic production reduces transportation expenses, loss of Intellectual Property (a huge issue in China), supply-chain uncertainty and lead times (catastrophic issues during the pandemic), and other costs and risks. Tariffs tilt the balance further in favor of domestic production.
8. Foreign manufacturers can avoid tariffs by producing in the US. All major foreign automakers already manufacture vehicles in the US. In terms of “US content,” Honda models are right behind Tesla on top of that list. Tariffs will further encourage US production, including of components and assemblies.
9. Many producers have cut prices in the US over the past two years, either directly or through incentives to reach their sales goals, including automakers (here) and homebuilders (here). In this environment, they will eat 100% of any tariffs because they cannot pass on any additional costs.
10. Industrial robots cost about the same anywhere. Products can be and are manufactured in the US price-competitively when advanced automation reduces the labor-cost component. Tariffs add some pluses to that math.
What Trump’s economic team is saying about Tariffs.
The top economic appointees-designate of the incoming Trump administration have come out and discussed tariffs and trade policy. The quotes were collected by Seeking Alpha:
Chairman-designate of the Council of Economic Advisers Stephen Miran: “In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries. Trump’s proposed tariffs could generate some $450B in revenue a year for the U.S. Isn’t it better to tax foreign entities for entering the American market than impose new taxes on American families? We [also] need targeted tariffs to lift such critical industries as defense. The U.S. relies heavily on imports to make the weapons and other material our military needs. This doesn’t make sense.”
White House Senior Trade Counselor-designate Peter Navarro: “We put on significant tariffs on China, steel, aluminum, dishwashers, solar, a lot of increased countervailing duties to stop the dumping [in Trump’s first administration]. We had zero inflation from any of that. It never happened, and it’s the same movie this time. Inflation is a monetary phenomenon, where we run a Federal Reserve that prints too much money, and they do that to accommodate fiscal irresponsibility.”
US Trade Representative-designate Jamieson Greer: “Tariffs can help support U.S. manufacturing jobs in particular, especially to the extent that they’re remediating an unfair trade practice. If you level out that playing field, it makes it so that Americans don’t have to compete unfairly.”
Commerce Secretary-designate Howard Lutnick: “When you’re running for office, you make broad statements so that people will understand you. Tariffs are an amazing tool for President Trump to use, and he understands ‘don’t tariff stuff we don’t make’ and ‘Build In America.’ We can’t sell a Ford (F) or GM (GM) in Europe because there are 100% tariffs. In Japan, [also] 100% tariffs [stemming from the Marshall plan]. How about we say, ‘we are going to tariff you like you are going to tariff us.’ Of course, they’re going to come in and negotiate, and their tariffs are going to come down.”
Treasury Secretary-designate Scott Bessent: “The truth is that tariffs have a long and storied history as both a revenue-raising tool and a way of protecting strategically important industries in the U.S. President-elect Trump has added a third leg to the stool: tariffs as a negotiating tool with our trading partners. Our size gives us market power and the ability to dictate terms – other countries need us more than we need them. We have but to use that power.”
National Economic Council Chair-designate Kevin Hassett: “If you look at the Republican platform, the first listed trade policy is the Reciprocal Trade Act, which takes U.S. tariffs to the levels that our trading partners charge us… What happens to inflation? Well, what’s the next best supplier? What’s the cost ratio between them? And if we bring new stuff to the U.S., what’s the marginal effect of the marginal cost? Don’t forget that the tariff affects the price level when it goes in, not the long-run inflation rate… Basically, it’s a level adjustment.”
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Really appreciate the even-handed evaluation.
Hear Hear. It’s why I keep coming back to this site, day after day, year after year (despite mostly keeping to the silent sidelines).
I think he is missing an important part. Cost of labor in US vs. Low cost countries. Any product produced in the US will just be so much more expensive and you just won’t be able to produce a t-shirt for 1 USD (as in Wolfs example)
Robots and Ai.. Yeah they gonna save us all ^^
I guess one thing left out is the affect tariffs have on domestic wages. They go up. So it may result in buying power too. Maybe the extra volume makes up for the higher cost….one can expect some of this to be true in some industries.
It levels the field a bit for wages and capital returns.
I think America and American’s have been screwed over by quack economists and their idea of free trade. Ricardo said….trade never ruined any country but that statement is true only when capital and labor are free. Not when capital is free and labor is not.
I think America, the average, has been compensated poorly for the competent society they invented.
Wages are not guaranteed to rise, but it’s possible (likely?) that more people get to keep their jobs at prevailing wages, rather than getting canned due to offshoring.
Quite interesting to see that Wolf is not 100% against tariff. It looks like almost all people I have met who consider themselves educated say tariff is useless and harmful because of the theory of comparative advantage.
They are educated but not smart. Democrats lost the election in part because of irrational claims about tariffs.
Theory of comparative advantage is a good theory, but it only makes sense when there is two-way trade, or balanced trade.
Non-economist,
Not surprising at all. Ever since I had this website, I have lambasted this one-sided free trade, this one-sided globalization, this rampant offshoring of production, the dependence of US companies on China, that have led to the huge and ballooning trade deficits.
Back during Trump 1, ca. 2018, I wrote to the White House in support of their tariffs but criticized how they explained them to the public. I published the letter here, and the (AI-generated?) responses from the White House (I can’t find it right now).
Bobber,
“…but not smart.”
That’s the understatement of the year.
When it comes to trade (and some other issues), Democrats are dumber than a doornail.
But at least in the past, Republicans were in the same boat about trade. Trump was the first President of either party to try to pull the ripcord on this policy and was heavily opposed by a lot of Republicans. He is going to face a similar thing now.
wiki : 194 countries utilize tariffs
Thnx for the big picture on tariffs
Many of those people are paper pushers and not involved in actually making physical products. Many are just grift in the middle and worried others might increase their purchasing power. A lot are worthless economists who cheer the economy being turned into a casino.
Well the monster that hiring the CCP to perform any job in the west at one third of the price of union labor. Which in my understanding that Union movement was popular during the golden glow of the end of WW2.
Tariffs are hardly useless. Access to the US market for Chinese product produced by a destitute, communist party member is the problem.
Capitalism is normally distributed.
The theory of comparative advantage is something they teach in undergrad econ. The theory is presented in a perfect environment – each entity has a “comparative advantage” in making one thing, and if they focus on that one thing, abandon the others and trade for the thing they have comparative advantage in, everyone is better off. It’s like undergrad physics and the model of the perfect sphere in a vacuum. It’s not the real world. Also, benefits for all from comparative advantage requires completely free trade. Also, it ignores the hapless entity that does not excel at anything.
In the real world, the point here is that one big difference is that there is no free trade. It is free on the US side, and highly protected on the trading partner side. Second, trading with a poorer partner pulls wages down in the wealthier partner, and increases wages in the poorer partner.
The next real world issues are the loss of control of supply chain, the sensitivity to supply shocks driven by offshore forces, the loss of intellectual and manufacturing capital to artificially cheaper partners, and the secondary effects of these factors.
Trying to apply model undergraduate theories – which provide a very basic starting point for thinking about things – to complex real world situations is like trying to apply the “perfect sphere in a vacuum” to an airliner’s rapidly icing, deflecting wing in a thunderstorm with varying temperatures that might get hit by lightning.
One can say, “the basic physics doesn’t change” – yes, but much more than the basics physics is required to model the behavior, and the results change. Also, econ – and the social sciences in general – do not have the clean equations that physics does. That’s called “physics envy”, and it’s a reason behind the pursuit of “mathiness” in econ, and the current movement away, towards “behavioral economics”, espoused by multiple Nobel laureates in econ, who have a belated understanding that their equations do not accurately model the behavior of economic systems. The models can describe certain narrow phenomena after the fact but have little predictive power.
tl;dr: model undergrad theories do not accurately describe real world systems, either in physics or in the social sciences, like econ.
Take it easy on ”undergrad physics” chicken:
Mine required ”hands on” lab 3 hours per week to go with the lectures,,, and we damn sure did ”real” experiments on real stuff to go along with and support the classical theories, based on ”extensive empirical evidence” we were being taught.
OTOH, couldn’t agree more about the so called social sciences that I later studied extensively at the best public university in USA after I became too lazy to continue the work to get my degree in actual what are now called ”hard” sciences.
Interesting theories abounded, far damn shore.
Couple of bones to pick here:
“US importers may negotiate the purchase price to where the foreign factory eats part of the tariff, in which case foreign producers pay the taxes to the US government.”
Not actually. I built two businesses on imports from China. I may get a price reduction from my supplier but this simply lowers my cost on the import. Which diminishes the “tax” paid to the Government. Which is not a good thing for the Government. I would have to pass that on to the market as I was already competed into the ground before the additional costs. If the market accepts the elevation that is called inflation. And if the market doesn’t like the pricing I close up shop or sell out and my employees get a pink slips. That is called unemployment.
“4. Tariffs are a direct tax on the profit margins of foreign producers and US importers. ”
In no way does the tariff cost the foreign supplier profit unless they decide to reduce prices to the importer. They are not “paying tax” to the US Government. Ever. The US Importing company pays the tax. This is the inflationary nature of Tariffs. And again, if the supplier lowers cost the impact is less tax collected. See above.
“7. Domestic production reduces transportation expenses, loss of Intellectual Property (a huge issue in China), supply-chain uncertainty and lead times (catastrophic issues during the pandemic), and other costs and risks. Tariffs tilt the balance further in favor of domestic production.”
At US wage rates the typical Walmart customer would find US produced products doubling in price. C’mon man…
“10. Industrial robots cost about the same anywhere. Products can be and are manufactured in the US price-competitively when advanced automation reduces the labor-cost component. Tariffs add some pluses to that math.”
Tell that to the Longshoreman’s Union. Or any other labor Union that negotiates to stop automation. And has the clout to succeed. Remember, unemployment is a major factor in our economic puzzle.
Industrial robots will cost more in the US due to tariffs.
randall hooker
You got things backwards because you benefited from the one-sided free trade policy of the US, and are a culprit in the US trade deficit with China, and cannot see the issues, blinded by the money you made handing US production to China.
So from bottom to top:
#10. With more domestic production thanks to tariffs, there would be less imports for the longshoremen to go on strike over. One more reason for lots of tariffs. Also, longshoremen are the wrong topic… they’re not into manufacturing, they’re in transportation. They also opposed containers back in the day.
#7 is emotional fearmongering. Walmart is a top culprit in the catastrophic US trade deficit. You’re a small culprit in it. Walmart has made decades of gigantic profits using cheap Chinese imports to hollow out US manufacturing. Walmart has now learned a lesson and has started to source even T-shirts and hoodies made in the USA (mostly by machines). Yes, industrial robots do a lot of the work despite your BS about the longshoremen.
#7 part 2: “At US wage rates…” yes people like you, in search of cheap labor in China and elsewhere, have CAUSED wages to be low in the US. Can you not connect any dots? You look for cheap labor in China, which guts US suppliers, puts downward pressure on demand for labor in the US, and downward pressure on wages, and then you complain that people in the US don’t make enough money to buy stuff???
Your first section and #4. you’re fooling yourself. In reality, tariffs get pushed up the supply chain as you admitted through lower prices, and the importer obviously pays the government, not the supplier. That importer can be a foreign company, such as BMW or BYD, or a US company. But they will push at least part of the cost up the supply chain, and so their suppliers are paying part of it, even though the importer pays the government.
Bob Burner,
“Industrial robots will cost more in the US due to tariffs.”
Or they can make more of them in the US to dodge the tariffs? That’s the purpose of tariffs!
You completely misread some of Randall’s statements, for example about US wages.
You’re admitting the tariffs will be a failure with the Walmart example. Americans want cheap stuff. Walmart wants huge profits. Now we have robots/machines in America producing the cheap stuff. Win for consumers, win for the corporation. Blue collar labor can just shove it I guess?
In this scenario owners of capital (the ones funding the robots) are going to be the biggest winners since we’re shifting production from cheap foreign labor to cheap American robots. Blue collar labor will continue to not be employed. The rich get richer and the poor stay poor. Yippie?
Also Hassetts quote about tariffs just being a level adjustment sounds about as tone deaf as the Biden administration saying 2021 inflation was just transitionary
“Blue collar labor can just shove it I guess?”
And then you unleash a tsunami of braindead BS.
Factory labor is skilled labor today. Automation does a lot of the work, but some workers are still needed, not only in the assembly but also in dealing with the robots (ranging from maintenance to tech work). So today’s factory labor is much more skilled labor than just manual laborers used to be. These are very desirable jobs, not sweatshop jobs. Look at a modern factory. Shifting manufacturing from China to the US CREATES THESE NEW JOBS IN NEW FACTORIES IN THE US and it creates secondary and tertiary jobs around the factory. You don’t like those jobs???
This anti-tariff bullshit is just exasperating. DO you people get paid to post this BS?
Right On WR:
Working to construct a new building for a state supported industrial training facility to teach new skills to local workers for them to be able to work in the new multi billion dollar factory nearby, I learned that almost every job in the new factory would be highly skilled and very highly paid relative to the local pay scale.
It’s a new world out there, and most young folx are getting the picture of it IF they want to.
Robots are dangerous idiots and can never be any thing butt.
Robot is a very loaded term. Define it.
If you mean a machine that has the same intelligence of a blue collar labor then your argument may be correct (only by first order effect).
But those kind of robots are too far in the future.
If by robot you mean more mechanization then humans are still needed. Car companies are highly mechanized yet they employ more people than they ever did 40-50 years ago.
Devil is in the details.
“they employ more people than they ever did 40-50 years ago”
That’s nonsense. A auto assembly plant today has 2-5000 workers. Back in the day, it would take 50,000 workers to build the same number of cars — except back then those cars were very simple to build, and today they’re immensely complex. There are not many people in these plants, compared to how many there used to be. there is no comparison.
“In this scenario owners of capital (the ones funding the robots) are going to be the biggest winners since we’re shifting production from cheap foreign labor to cheap American robots. Blue collar labor will continue to not be employed. The rich get richer and the poor stay poor. Yippie?”
This is an interesting point. The “consolidation of the production of value” has been a consistent feature of increasing technological advancement. What do I mean – more value (i.e. the things that people value) is created with fewer people due to technology. First, it was farming, most people were subsistence farmers. Agricultural technology allowed a smaller and smaller group of people to feed the demand of the larger population, pushing the marginal producers out. Very disruptive, certainly, but that’s another (important) issue.
Then, manufacturing – technology allows fewer and fewer people to generate value. With textiles, the cotton gin and loom are examples. Maybe 100 people were needed to run a store, now it takes 20. Instead of 500 people to create a ton of steel, it may take 5. Instead of having someone edit records at a pace of 5 an hour, that someone can edit records at 100 an hour.
Now they’re talking about AI and its impact on the generation of value. Unknown yet the emergent behavior its neural networks (transformer (chatGPT), convoluted, etc) can achieve are unclear but uncanny so far.
The problem I see is the owners take more and more of the value (wealth consolidation) than labor who is helping to create that value. There are many reasons for this, based on monetary and tax and fiscal policy, as well as social mores and policy. Jobs and money are how purchasing power and thus demand is distributed.
While our technology is making life better, the increasing inequality in purchasing power, especially for those creating real value, is leading to social pressures which can be seen in many different arenas.
Excellent response
Really, how so? It reads like the response of someone benefitting from the status quo and scaremongering any change that may impact the gravy train.
Spot on. The guy outed himself as someone who took advantage of the one-sided trade and (probably) made himself wealthy on the backs of sweatshop kids in Shenzhen.
Any company that goes bankrupt, like this yahoo hopefully does, deserves it for putting all their eggs in China’s basket.
It was a weak comment. Very weak.
People who post this BS about tariffs are against US labor and for long term destruction of the country. There’s a reason why Teamsters didn’t endorse Democrats this year.
Automation (semi or full) makes people more productive and reduces errors. From doctors to pilots to machinists to manufacturing. This is 100% a good thing for an economy.
The longshoreman’s union can and probably does use some automation (cranes, forklifts, software) to maximize its productivity to justify the highest pay they can get. Is it true that they are trying to “stop” automation?
“The US Importing company pays the tax. This is the inflationary nature of Tariffs. And again, if the supplier lowers cost the impact is less tax collected. See above.”
Did you think through the second to last sentence of this statement? Sure if the supplier lowers the cost a little less tax will be collected since the tariff will be applied to the lower price. However, the cost reduction reduces the inflationary impact directly and still provides tax revenue to the US government. It’s a win-win for the US (increased tax revenue and limited or no price increase for consumers) and a loss for the foreign supplier. You’re basically making the case for tariffs if the market will not allow for increased prices at the retail level. On the other hand, maybe the importer is forced to absorb some or all of the tariff, which is probably your primary concern.
You seem like you are part of the problem and can’t actually comprehend the solution. Classic beneficiary of bad policy
Perhaps I don’t get the tariffs against Canada. So Canada’s main culprits to the trade surplus are natural resources, key minerals, oil, etc. But the US will put tariffs on Canadian goods and Canada will either put on export taxes on the natural resources or put tariffs on US goods.
The US is already getting oil from Canada at less than the international prices.
So really, what is the point of putting tariffs on Canada when the US is using the resources they get from Canada, at a bargain price, to more efficiently and economically produce goods?
There’s economic theory and there’s performance theater. Throw in some negotiating leverage for good measure.
There should be no exception on tariffs, ideally. Just a tax on all imports, rather than an equivalent tax on income of American workers. Canada is encouraged to do the same, it too has a huge deficit and needs the revenues from tariffs, instead of taxing Canadian workers even more; it would also encourage domestic production where possible and raise taxes where not possible.
Tariffs are better than income taxes because they push the incentives into the right direction.
BTW, Canada already protects some industries from US imports, including dairy.
I think you’re overlooking the “Protectionism” angle here. Tariffs raise prices on natural resources imported from Canada, right? Higher prices create an opportunity for domestic development in the U.S. where we can’t compete based on price.
Tariffs mean costs/prices DO go up! That creates incentives for domestic industry to compete — which they MUST need, otherwise we wouldn’t need imports. The long-term intention is for the U.S. to grow its own trees, pump & refine its own crude etc.
That scenario starts to look less compelling if you consider industries that are particularly destructive, like mining rare earths. One of the privileges of importing our germanium and antimony from China has been offshoring the environmental impact. So there are considerations beyond just cost.
Retaliatory tariffs (tit-for-tax?) also raise costs — potentially incentivizing domestic industry development in Canada.
Overall, I sympathize with your perspective which I read as, “If we make prices higher, doesn’t everyone suffer from higher prices?” And the answer is yes. We cross our fingers and hope that the second-order consequences are worth it.
When a profit maximizing machine says they want to keep your prices low, don’t believe them.
Who will be the biggest losers in the US if there is an across the board increase in tariffs on imports? What companies will see the biggest hit to their profits?
Losers among US companies: Importers. Among foreign companies: exporters.
Winners: companies that manufacture in the US and companies that can figure out how to shift production to the US. But all this takes many years, as we see with the booms in the construction of factories for semiconductors, EVs, EV-batteries, etc. Not happening overnight.
Hi Wolf,
Thanks for the article- this has been helpful. My concern in the short-term, as you wrote, “ But all this takes many years…”
So in the interim between the tariffs being applied to a product “X”, and the many years for US based companies to produce product “x” here stateside, won’t consumers simply have to pay a higher price since no equal to substitute exists yet produced here in the US? This could be very inflationary at the onset, no?
Thanks for all you do (I hope I didn’t give the impression I think tariffs are BS- just trying to learn more).
Sounds good on paper but don’t expect a bunch of tee shirt factories to pop up. Now if you’re talking about making a $200k Mercedes cost $400k I’m all in!
“…but don’t expect a bunch of tee shirt factories to pop up.”
I didn’t expect that either, but LOL, I was wrong, as I told Randall Hooker further up the thread:
Walmart has now learned a lesson and has started to source even T-shirts and hoodies made in the USA (mostly by machines).
It would not be a terrible thing for Americans to break their addiction to piles of cheap stuff made in countries with extremely low wages and no environmental protections. They’ve been more than happy to trade US jobs for a TV in every room up until this point. We’ll see how long the enthusiasm for less stuff lasts.
Sandy,
Hard to break addictions given the massive amount of advertising spent, although certainly don’t disagree with you. Minimizing labor costs and of course avoiding environmental concerns is how you maximize profit and that is the singular goal of our system.
Like refrigerator,microwaves dishwashers all junk
I am not sure that the increase of 25% on Alberta oil and Quebec electricity will help US economy. What out for what you wish for…
Energy is a commodity. It dares you to raise prices when others don’t, LOL. Demand goes where prices are the cheapest… in the US.
In addition, it will encourage the US to build more pipelines from the producing regions to the upper Midwest where the Canadian oil ends up, and building pipelines is a huge economic benefit, in addition to the benefit of importing less oil and using more of our own oil.
Electricity purchases in the US follow demand and prices. If Canadian electrons get more expensive than US electrons, utilities will go for the cheaper. Electrons are electrons. There is no brand differentiation. That’s the purpose of tariffs. It might also encourage additional investment, which is also the purpose of tariffs.
The anti-tariff BS here is ridiculous. I have already deleted about 20 anti-tariff BS comments. This is worse than the anti-EV BS comments in articles with EV in the headline.
Ultimately, if you end up with the US shipping oil, electricity, whatever, further across the US and Canada shipping oil, electricity and whatever further across Canada, with both sides building new pipelines and hydro right of ways and so on, just to re-create the trade that was already in place and working across shorter distances with the pipelines and wires already built, then both countries are worse off for no particular benefit.
It would be as if you drew a line between Oregon and California and said that you couldn’t ship hydro-electricity south and you couldn’t ship solar power north. California has to build more high cost electricity generation and so do Oregon and Washington, and for what? For nothing, just for the sanctity of the line on the map that you drew.
One sided trade with China and other countries that engage in various interventions to avoid having their trade accounts balance is a different story, and I agree more with your post on that part of it Wolf.
You’re making up problems. You don’t have to do the math for them. They know how to do the math. In addition, producing regions always have to build pipelines to get their product to market. That’s part of the deal. There are gas and oil pipelines crisscrossing the country for that reason. Same with high-voltage trunk lines. Outside of Texas, the US grid is connected, and you put electrons into it at one end, electrons become available at the other. There is a vibrant wholesale electricity market in the US, with generators selling their electrons on the spot market and utilities buying them. I don’t know what problems you’re making up.
No inflationary consequence as domestic producers raise prices to be just a touch under the price of the imported goods? I hope my already expensive US made oven does not break!
RTGDFA.
That’s why I wrote it.
No one mentions the costs to the
safety net . NAFTA killed small towns
all across the US . Tell a factory worker
in his or her 50’s to retrain for a new career or go work retail for a third of the previous wages that Free Trade is good for him. First world expenses on third world wages don’t work.
Free trade is of course relative as you grow domestic production with protectionism. The idea that we are the most free trade isn’t really true as it is a scale and there are institutions that measure it. In the end however it is irrelevant as the US chased and continues to chase low cost labor in order to maximize profits. The fact that tax payers will now subsidize corporations to build here while they make record profit and pay low taxes should be what people are upset with. Unfortunately our economic model doesn’t allow society to equally benefit from the ruling class that protects it. Otherwise Luigi wouldn’t have a 50% approval rating, well beyond any of our democratic institutions.
Perhaps we all forget what happens when a country goes to war. In wartime there are shortages. If vital war material comes only from abroad you will lose the war. Therefore, contrary to my Economics 101 schooling, it is better to produce all wartime material at home, as well as all the.raw materials needed to produce it.
Additionally, we now have many immigrants who need a job. What better way than tariff the foreign high enough to force him to produce here and hire immigrants. This increases our GDP, hires Americans and would be Americans, and pays off the US deficit.
Up until federal income tax laws became effective in 1916 most if the income for the US federal government came from tariffs on goods with much of that 9onb whiskey tariffs.
Tariffs are on imported goods and you’re correct that throughout the 19th century that was the primary source of Federal revenues. Most whiskey consumed in the US is and was produced domestically, however, and the taxes imposed on it are excise taxes.
While I agree that inflation was minimal from 2016-2020 when Trump imposed the first set of tariffs, I think it’s misleading to say it was totally non inflationary. I think we just failed to get much inflation from that time period because the tariffs were relatively small and did not kick in until later in the term. It took time. I think raising tariffs a lot as is the plan may kick off higher inflation this time.
Even if companies succeed in passing on all of the tariffs, which they didn’t back then as you can tell from low inflation figures at the time, even in that worst-case scenario, it’s just a one-time bump in prices. To use my example in the article of a 25% tariff on T-shirts, the retail price of those T-shirts would go from $9.99 to $10.24, but then stay at $10.24. So there would be in that worst-case scenario in this example a one-time 2.5% increase in the price of this T-shirt, and then no more increase after that.
Wouldn’t the price of the ten dollar tee shirt with a 25% tariff become 12.50
RTGDFA.
“Basics” #3.
3. Tariffs are applied to the cost for the importer. If a big US retailer buys T-shirts by container loads from a factory in Bangladesh that it intends to retail in the US for $9.99 each, and if the tariff on this product is 25%, the importer (the retailer) is going to have to pay 25% in taxes on the cost from the factory. If the factory charges $1 per T-shirt, the tariff amounts to 25 cents.
Why raise it to $10.24 when you could raise it to $11.24 and blame the whole increase on tarriffs? I know you’ll say something about its what the market will bear. But serious question, when inflation was significant, didn’t margins also expand in the past several years? Maybe it was Modelez who expanded margins while also increase prices due to “input costs” to levels that were never historically seen in that company. Or the shrinkflation scenario where you pay the same, but the product got a little smaller.
There are times when everyone pays whatever. That was the case from 2021-2022. But then those times ended, and manufacturers have to CUT prices to keep their sales up, including automakers, and homebuilders too. They cannot include any tariffs now. They have to eat 100% of any tariffs. Stellantis sales have collapsed because it was trying to jack up prices too much, and it’s cutting price by huge amounts. You’re trying to deny reality.
More rare common sense from Wolf!
Tariffs can be a great thing if applied in the right direction, AND if coupled with an industrial policy to ENCOURAGE local production.
Carrot plus stick.
Tariffs won’t do much good if government and existing monopolies block new factories.
DM: Healthcare giant Prospect with 182 hospitals and clinics spread across the US abruptly files for bankruptcy – and plots to ax facilities
A healthcare giant, Prospect, that owns 16 hospitals in four states has filed for bankruptcy. The company, which was once an active buyer of struggling hospitals, has debts of more than $400 million. It currently has 166 clinics and employs 12,600 people. The company is attempting to sell its operations to rivals but has faced problems offloading assets in the past.
This was the result of PE firm Leonard Green sucking the bejesus out of it before dumping it. PE firms should be barred from owning healthcare operations and facilities.
Absolutely agree with you….
Wolf, can’t recall your position on PE Firms, but do you believe there is economic benefit from PE Firms or negative effects, or both, or just a way for rich to take advantage in some way to get richer?
They can be ok if they actually invest to improve the business. And some do. And that’s great. But others don’t, and instead heap huge amounts of debt on the acquired company in order to pay for the acquisition (leveraged buyout) and pay a special dividend and fees back the PE firm. Then the debt payments prevent the company from investing in new equipment, inventories, etc., and doing what it needs to do to thrive, and the main focus then becomes cost cutting to have enough cash to make the debt payments, and gradually the business goes to heck.
doesn’t the ultimate blame there lie with the lenders willing to extend these loans to these post-acquisition companies?
It would be fascinating to find an accurate case study of a PE purchase of a firm.
As I have been able to glean, the PE firm modus operandi is to identify a company with cashflow that can service the debt it is about to be saddled with; then saddling the company with high debt; selling off company resources, and slashing staff to maximize cashflow to the owners (who already made their money in the initial transaction). You don’t want your medical provider to be a PE believer, or under PE stress to deliver more profit.
When I walk into a store taken over by PE, the formerly filled shelves are bare, and there are a lot fewer staff who are driven harder.
I have the distinct impression that modern business schools simply teach leadership how to cripple businesses while providing maximum returns to the owners.
Businesses create value and create jobs and distribute income. These are socially beneficial goals. Allowing the looting of businesses should cause law changes to prohibit that. Mafias are illegal because they are extractive, and unjust. I see little difference between the legal looting of a business and a mafia, in terms of value creation. Corporate looters and mafias are value extractors and consolidators, not value creators. They harm, not help the standard of living.
There was an Economist magazine cover years ago, after the financial crisis, titled, “The Question of Extractive Elites”. Thought provoking, worth looking up IMO.
Could get very interesting with rare earths etc. Seems like we are going backwards and will have even less reason to get along.
Will most Americans see any benefit from protectionism? Perhaps in decades, but you have four years for it to work and not cause inflation.
“rare earths” are not rare at all. They’re abundant in the US and elsewhere. But they’re very messy and complicated to separate and refine, so much of the production was offshored, creating this terrible dependence on China. The US is the second largest producer of rare earths, mostly at the Mountain Pass facility in California’s Mojave Desert.
Tariffs are not inflationary — they lower the deficit, thus they operate to counter inflation. Deficit spending is currently about 6-7% of GDP and not offset by increased tax revenue or producitivity. It is a major contributor to inflation.
And tariffs are not going away in 4 years either. The first round began in 2017. There’s increasing support for bringing even more industry back to the USA and tariffs will be a major policy tool in accomplishing that.
It’s so sad that the rest of the world is kicking our ass economically.
How do the tariffs work if I partially assemble my product outside the US and then finish it in the US? Let’s say I make cars in Mexico, but ship them over the border and do the paint job in the US and then send send them off to the dealers to retail. No tariff for me?
Can I buy the T-shirt factory to dodge the tariff? Or does that just force me to pay the 25% tariff on the whole $10 they retail for instead of the $1 I would pay if I bought it from the factory?
Tariffs are applied to the cost of the import. It doesn’t matter who owns the manufacturing plant in the foreign country. If you own the plant in the foreign country, you still pay tariffs when you import from your plant, like GM would have to pay tariffs on its Buick Envision, which it manufactures in China, and imports into the US.
Our Stockholder culture will continue to maximize profits forever and ever, the end.
People are too addicted to, and accustomed to, low prices on imported goods. That behavior is deeply entrenched. They won’t stop that behavior. They will just pay more for the “common good” principles behind the tariffs that Wolf discussed in this article in the long run. Why? Because of this pesky stockholder culture in search of ever increasing profits.
Consumer behavior won’t ever change. The consumers will just demand higher wages to cover the ever increasing costs of the shit they just must have. Wage price spirals and ever increasing corporate profits the result.
That’s my prediction.
Possibly. Another undiscussed factor is the supply chain risk when all you do is import. Much of Europe has had to do a major shuffle on fuels due to Russia/Ukraine. Think about the Great Toilet Paper Crisis of 2020, imagine if we were reliant on imports.
More onshoreing reduces security risks. I would rather see more of our money stay here.
The passage of tariffs on manufactured equipment from Mexico would be a massive positive impact to our Midwestern manufacturing operation. Our competitor south of the border has been soaking up ever more market share since the passage of NAFTA. I am highly skeptical and not getting my hopes up that Perot’s “giant sucking sound” could possibly run in reverse for a change.
If the tariffs do actually happen and they stick, I lose a bet with my father that results in me getting an “I love Trump” tattoo on my rear end, despite not being a fan.
We will see soon… :)
Would the physical delivery of a future’s contract at its expiration be considered an import if the seller had to source the underlying asset from an external location?
This concern has recently created a significant divergence with the CME’s GC gold futures from spot XAU/USD contract, which will encourage liquidity away from the United States.
Interesting article with even more interesting details. I pick out point 8 “Foreign manufacturers can avoid tariffs by producing in the US”.
Foreign manufacturers can even be more “encouraged” to move their production to USA by disrupting the energy supply in their home countries causing energy prices to spike and therefore making little or no economical sense to continue production in their home countries.
In order to survive, the manufacturers will have to make a “well considered” decision by moving their production facilities “voluntary” to other countries, such as USA.
Ooohhh wait…. This process is actually already going on.
The folks who b*tch about applying intelligent tariffs and opine about how perfect the post GFC “Cheap Imports” US/European hyper-finacialized economies are the same people who have thrived off the free money global shadow banking economy, all courtesy of the zero-bound interest rates and near-zero carrying costs on $44 to $70 trillion (estimates range) in uncollaterialized loans and derivatives in offshore dollars (Eurodollars) dumped for at least 2 decades by Western Central Banker printing machines. Inflation and recapitalization at deflated mark to market values is the cost of the collapse of this financial parasitic system. The only way out is to rebuild real core economies based hard assets, reindustrialization, unmanipulated commodities valuations, and balanced trade. Tariffs that incentivize both sides of the trade to optimize their range of resources put every trading partner on more equal and secure footing. China, Russia, India, and the Global South are done being the West’s “gas stations” and child/unskilled labor hunting grounds. They are already making these moves and all our idiotic punitive sanctions are mill stones sinking the Western cruise ship.
Thanks for the explanation Wolf. In theory, if tariffs are imposed even handedly and with specific policies in mind (e.g. boost domestic production of electronic chips), they may work for the USA. However, I am very skeptical that the incoming administration has the country’s interests at heart. My understanding is the President can arbitrarily carve out exceptions (of course they will have some “rationale” to justify that) for anybody. So they will get kickbacks from companies and favor them by carving out exceptions or otherwise not impacting them much. Judging by the torrent of million dollar donations and rapid bending of the knee by various billionaires, it appears they understand what they are up against and bribing accordingly.
Policy is one thing. Implementation is quite another. Tariffs appears to be a policy with enough room for corruption.
SINGAPORE (Reuters) – Supertanker freight rates jumped after the U.S. expanded sanctions on Russian oil trade and sent traders rushing to book ships to pick up supply from other countries to go to China and India, shipbrokers and traders said.
Europe seems caught in the middle. Went along with the US on the Ukraine war, had their cheap Russian gas blown away(literally) and is stuck buying US gas at much higher prices. I think they call that ‘fighting for democracy’. Now Trump will have a vast export field of fracked gas to play on…
It all could work. Tariffs here in Europa are ridiculously high. As they will not come down on their own, the US should meet them equally.
But i’m missing the imbalance in the issuance and use of currency, the biggest export article the US produces and highly depends on.
That should also be included in the mix. Which should lead to competition on that front.
I’m all for that. Competition on production and quality, winning the customer. And not on quantity and power, forcing the customer.
I was curious how tarriffs might affect the car parts market – OEM and aftermarket – so I had a look around my garage…
Oils & fluids: all made in USA. Both Honda fluids and aftermarket (Kirkland 5w30, shop pro power steering, peak coolant).
K&N oil filters: made in USA. Can’t remember where the cabin air filter was made but prob USA.
AEM engine air filter: made in USA. The CAI ducting is from K&N, also made in USA.
Spectra intercooler: made in China. The ETS-brand intercooler I really wanted used to be made in USA.
Duralast swaybar links & CV joints: made in China.
TRQ lower control arms: made in Taiwan.
Progress Tech rear Swaybar: made in USA.
OEM Honda swaybar bushings: “assembled” in USA
OEM Honda coolant reservior cap: made in Japan (!) – but I got this on ebay, not thru a dealership.
I’ll be picking up an OEM oil dipstick and PCV valve today, which I predict will say made in USA.