Several items:
1–At X, there’s some knowledgeable commentary on the relationship between tariffs and retail prices, from Craig Fuller @FreightAlley: “When products are imported into the US, the importer is charged a tariff based on the declared value of those imports, not the marked-up retail price consumers will eventually pay…The markup might be only 5% for big-ticket items like cars, while it could be as high as 500% for luxury goods. Most retail goods have markups of over 100% over their declared value.” He discusses the alternatives available to importers and suppliers, of which ‘raise retail prices’ is only one. Link.
2–The WSJ, a while back, had several letters on tariffs in response to an article on that subject. One of them said:
Phil Gramm and Donald J. Boudreaux don’t mention the basic evil of tariffs: that they negate comparative advantage. If Product A can be produced cheaply or efficiently in Location 1 and Product B in Location 2, each location should concentrate on its speciality and trade to the benefit of both.
Imagine Massachusetts enacting a tariff on oranges to protect an industry of heated orange groves and Florida a tariff to support air-conditioned cranberry bogs. State politicians could trumpet creating a new industry, but OJ would be $25 a glass in Boston and cranberry sauce would be $10 a scoop in Miami. Tariffs amount to a “beggar thyself” policy. The Constitution’s framers recognized this and crafted the Commerce Clause to forbid restriction of trade by states. The same principle applies to trade between nations.
Trade based on relative efficiency of production, as for the orange/cranberry example, is a classic example of the advantages of trade. But a high proportion of trade today is not of this nature: it is simply labor arbitrage, based on differentials in wages. The primary reason why products made in China have been so much lower cost than those made in the US is because Chinese people would work for lower wages than US people. There was nothing inherent in Chinese geography or climate, or Chinese skill sets, that made assembly of iPhone more efficient in China than in Iowa.
3–In my Labor Day post for 2021, I said:
In a world with global and highly-efficient transportation and communications…and billions of people who are accustomed to low wages…is it possible for a country such as the United States to maintain its accustomed high standards of living for the large majority of its people?…and, if so, what are the key policy elements required to do this?
This question should be fundamental to discussions of trade policy, along with national defense and resilience considerations.
4–Bill Waddell, a very experienced manufacturing practitioner and consultant, who used to comment here sometimes, has a new book out: Reclaiming American Manufacturing: Take Back the Middle Class From Globalism. A quick and worthwhile read, available on Amazon Unlimited. Also, this post at LinkedIn.
5–Although offshoring is usually discussed in terms of its impact on manufacturing, there is also plenty of offshoring going on in service: Telemigration.
Your thoughts?
Neither oranges or cranberries are vital to our continued existence as a nation. Not having the ability to mine and harvest raw materials, to produce steel and other vital metals, to develop and manufacture complicated electronic components are.
Interesting post and discussion thread about a particular part being made in China at what seems like an unrealistically low cost:
https://x.com/gak_pdx/status/1855683867887477123
Implicit in the Ricardo “Free Trade” model is that the economies on both sides of the trade are running well and the trade is balanced. That perfect picture did not apply to the UK’s 19th Century experiment in unilateral “Free Trade” which undermined the UK’s economy. Nor does it apply to the US today — see the unsustainable trade deficit, mis-employment in unproductive government jobs, and the national security-destroying de-industrialization.
It would be quite feasible to have a low income tax/moderate tariff economy. In fact, that was the kind of regime under which the US and other countries have prospered sustainably. The productive worker is going to bear all the tax or tariff burden anyway. The issue is how to arrange that tax/tariff burden in the most useful fashion.
We also have to note that much of the advantage which China has does not come from low wages — it comes from much more reasonable regulatory burdens and from the absence of self-enriching Big Law. Modest tariffs, roll-back of unproductive regulations, and a throttling of Big Law’s litigation would encourage re-industrialization, bringing with it associated jobs (good for society) and additional tax revenues for government. What’s not to like?
But a high proportion of trade today is not of this nature: it is simply labor arbitrage, based on differentials in wages.
Thank you for noticing. If only we had a political establishment that would also notice and react accordingly. But since a great fraction of their wealth depends upon this sort of labor arbitrage it’s one of the many problems the country faces that they seem utterly unwilling to admit. Hence Trump etc.
Interesting post and discussion thread about a particular part being made in China at what seems like an unrealistically low cost:
I’m shocked- shocked I tell you- that China would do such a thing that would quite likely bankrupt any American firm that might attempt to compete. Don’t they know the steely principles of free trade demand they never do this!!
Anyway, I spent a good amount of time as (usually) the only person advocating for tariffs at another website, which earned me a good amount of mockery. Near the end, I recall telling one of my favorite people there- having grown weary of the usual habit of regarding economics as a sort of math equation- that I wanted tariffs so that the United States could retain a Republican system of government.
I simply do not believe if we continue to have wages effectively decline such that too many people working full time jobs or multiple part time jobs need to borrow money to buy food that the present Constitution will continue to exist. Reportedly the people who live paycheck to paycheck are the people who swung most to voting for Trump and thereby against the regime. But note also that the people the regime has flown into the country to provide likely votes after a future amnesty don’t face this worry- their living expenses are well paid by lavish subsidies.
None of this is sustainable.
We have antitrust policy to deal with predatory pricing. Tariffs can serve the same purpose.
I’m always surprised that the connection never seems to be made.
Stan…could you expand on that thought? thanks!
Not Stan, but as Gavin pointed out different regulatory regimes are a big deal. It’s been noted many times that the West’s huge reductions in carbon emissions is largely a result of exporting them to places like China.
As alluded to above, the environmental regulatory burden is lower in many places overseas.
Chinese workers are also cheaper because they have fewer legal protections, in areas like safety, discrimination, and minimum wages.
Point is, you can use tariffs to compensate for bypassing the regulations on-shore businesses have to work within.
An article at the investment site Seeking Alpha: Amazon Is A Sell On Trade War Fears. Excerpt:
“Some reports suggest that Amazon’s China-based merchants account for nearly half of the third-party gross merchandise volume and almost half of Amazon’s 10,000 sellers are based in China. Amazon itself hinted at this when it stated the following in its latest annual report: ‘In addition, because China-based sellers account for significant portions of our third-party seller services and advertising revenues, and China-based suppliers provide significant portions of our components and finished goods, regulatory and trade restrictions, data protection and cybersecurity laws, economic factors, geopolitical events, security issues, or other factors negatively impacting China-based sellers and suppliers could adversely affect our operating results.’
The potential implementation of a 10% import tariff across the board and at least a 60% levy on Chinese goods imported to the United States could spell trouble for Amazon considering its reliance on China-based third-party merchants.”
https://seekingalpha.com/article/4734916-amazon-is-a-sell-on-trade-war-fears
But how many of these products are available *only* from China? And for those that aren’t, how long would it take before entrepreneurs in other countries…maybe even in the US…start supplying them?
I can imagine that high tariffs on Chinese goods would have a temporary impact on AMZN revenues & profits…but question how much of an impact there would be longer-term.
For the record, Dyson is manufactured in Malaysia and headquartered in Singapore. Very likely some proportion of the components are from China. Personally, I always figured there was an 80% hype premium in the price.
Anybody that has production in China can expect to see their IP stolen and knocked off on Alliexpress if there’s any market for it.
Gavin’s much more reasonable regulatory burden amounts to dumping anything and everything but most especially toxic waste into the nearest stream or vacant lot.
Keep in mind that we did not build the post-WWII Global Order for our economic benefit but because Josef Stalin+Russian nukes scared us witless. The attempt to keep the Zombie Global Order going after the fall of the USSR was predicted on The End of History, i.e. every country was going to become some flavor of semi-capitalist quasi-democracy (more or less). That died in a fire on 9/11, and the American public will not underwrite the cost of maintaining the NWO without an existential threat being present that requires a global alliance again.
The fact is the situation today is:
– We permit what amounts to slave labor to serve American corporations, without penalty, because it is ‘out of sight’ in a compliant country with a barbarous political system.
– We do not penalize those companies, through imposition of tariffs on imported goods, because they are also donors to politicians.
– The tariffs that would be placed would either be on luxury goods, such as the iPhones, or on goods that didn’t have to be shipped to another country to be processed, and could be produced at a reasonable price here (which would also restore a fair balance of trade with other countries.
– Some of those products are vital to national interests, and the raw materials should be imported from several different countries and processed here. In the case of electronics, failure to do so puts us at risk of permitting spyware and other dangers to enter our manufacturing, military, and financial systems. One such highly compromised product is the Lenova computers – they are cheap and contain embedded spyware.
MCS: “Gavin’s much more reasonable regulatory burden amounts to dumping anything and everything but most especially toxic waste into the nearest stream or vacant lot.”
It is interesting that US “recycling” economics were originally frequently based on sending US trash to China, who picked out the good parts and dumped the rest in the ocean. But Greenies did not care, as long as the pollution was taking place far away. Only Mother Earth cared.
While Chinese manufacturing has become much cleaner since then, lesser pollution restrictions are certainly part of the production cost advantage in many Chinese industries. But are you suggesting that the US should continue to happily go along with that? Are you not really arguing that there should be a tariff on Chinese-made goods equivalent to the same cost burden that Congress imposes on US manufacturers?
However, it would be foolish to take a narrow view of the damaging impact of the excesses of Congress and their regulatory agencies. I recall the story of the US start-up battery manufacturer which wanted to build the batteries in America. Their investors insisted on the company also building a parallel plant in China. The Chinese plant was built, producing, and climbing the learning curve before the US factory even got all its permits. It is impossible to compete when carrying that unreasonable burden of pointless bureaucratic obstructionism.
We have a choice:
(1) roll back excessive US regulations;
(2) impose tariffs on imported good equivalent to the costs of complying in full with all US regulations;
(3) become a poverty-stricken totally de-industrialized import-dependent “cargo cult” society where we shiver around camp fires while singing the praises of the religion of “Free Trade”.
“Anybody that has production in China can expect to see their IP stolen and knocked off on Alliexpress if there’s any market for it.” (from MCS, above).
It doesn’t have to be produced in China for that to happen; if it can be purchased and shipped to China, it will be reverse engineered and duplicated for a small fraction of the original cost, then sold to whomever wants it cheaper.
Greg Koenig, in the X post Divid Foster linked to above, termed it “Economic 5th Generation Warfare.” That is precisely what we’ve been seeing from Chinese goods for well over two decades.
It’s long established folklore that Orientals take a long view on everything: “plant a tree whose shade you will never share” is a very old Asian proverb and China has taken that to heart for centuries. Westerners’ ingrained impatience for “we want it now” has its place, at least where hesitation has a substantial cost, but there’s plenty of history to the contrary. Way back when, in the 1980s, Ford and Mazda formed a limited partnership;
the Ford Escort and the Mazda 323 were the same car under the skin, produced on the same assembly lines, with the only differences being trim and a few features. Mazda’s position was “offer it at a lower cost, the volume sales from the lower price will advance design, assembly knowledge and skill over time, and we’ll be able to reduce unit cost over time and the market penetration from low cost will offer an advantage; within 3-5 years unit costs will fall significantly amd we’ll achieve the profits on each car that we want.” Ford said “no, we want that per-unit profit on the first car off the production line.”
Ford won that argument because Money Talks and Ford’s market position in the U.S. equalled The Money.
West vs East. China has successfully mated the two philosophies: Absurdly low unit cost, thanks to below-zero government protections for employees, complete disregard for international IP agreements, near-complete ignoring of environmental considerations, export-supplied subsidies to corporations, and rapacious Western desire for “right now, cheap, so I can make money with it before sunset.” A Perfect Economic Storm way off the radar of international Western authorities obsessed with maintaining their personal positions among the Power Elite.
I spent over three decades in the computer industry and I can assure you what you think you know about the costs of taking several acres of dirt and making it into into a running chip fab is wrong; once the building is up, filled with equipment, the employees recruited, trained and equipped, line is debugged, fully tested, fully proofed, and running – not to mention the ongoing burdens of constantly advancing variable environmental regulations at each level of local, state and federal government plus taxation from each of those levels – the fun is just beginning. I have numbers that would scare you into sleeplessness for months about the full production costs – double digit dollars per f**king second (do the math on that for a 24-hour production day, and I’ve got data to show that’s low). In China that would be $200-400/hour because of the disregard for employee safety, environmental concerns, zero taxes, piracy of the IP used to originally develop the product, and acceptance of low-quality output that could be sold to secondary markets instead of scrapped.
“Anybody that has production in China can expect to see their IP stolen and knocked off on Alliexpress if there’s any market for it.” (from MCS, above). And Greg Koenig, in the X post Divid Foster linked to above, termed it “Economic 5th Generation Warfare.”
Without tariffs to forcibly level the playing field the entire West is doomed because China, and others, are willing to sacrifice almost everything to win; it will be small comfort for America to lead the way to that debacle. I don’t know about you but I don’t want my grandchildren to be wearing animal skins and huddling around scrounged-wood campfires roasting snare-caught rabbits. It’s China or Us, and I’ll support tariffs – and a lot more – to make sure it’s Us.
We have antitrust policy to deal with predatory pricing. Tariffs can serve the same purpose.
True but the regime doesn’t care about predatory pricing. Otherwise interest rates on credit cards wouldn’t be 27%, especially an interest rate on savings of approximately zero. Nor does it care about monopolies, or else Microsoft would have been broken up in 1990s. And it hates tariffs because as I noted above wage arbitrage is a great source of its wealth.
The problem is the regime. That is, the people who actually make decisions for the country and how it is governed.
It’s all well and good to notice what has gone wrong and offer up solutions, but until the people who have been running the country into the ground are replaced, it won’t matter.
As long as I’m here I may as well offer up one possible solution that won’t happen.
We need the environmental equivalent to shall-issue concealed carry permits.
That is, if you follow environmental regulations for your factory or restaurant or whatever the state has to issue you your permits, with none of the typical game of continually rewriting the rules or simply sitting on the application until you give up.
Implied here is that the regime is in fact capable of and willing to write rules clear enough to be followed. That’s not a given- I’ve been told the Obama-era EPA was not- but it should be possible, especially if Trump can restore some measure of competence to the government.
G=Franklin Branworth: “China has successfully mated the two philosophies: Absurdly low unit cost ..”
Let’s think about unit costs. Pay particular attention to Elon Musk’s observation that unit costs for a manufactured item decline exponentially towards the cost of materials as the production volume increases. High production rates were what allowed Ford to sell the Model T at a much low price than his competitors.
There was a time that the US was the home of very high production volumes. But Our Betters ensured that now China is the locus of high production volumes. The kinds of stories about the US Air Force paying hundreds of dollars for (US built) hammers and toilet seats are a demonstration of that. China makes beautifully manufactured hammers, sends them half way around the world, and can still sell them for $30. If a US manufacturer makes only a few hundred hammers for the Air Force, and has to recoup all its set-up costs out of that small volume, those hammers are going to be expensive.
This high volume/low price model is much more significant than the difference in wage rates between the US and China. A key way for the US to become competitive again is to increase the scale of domestic manufacturing. This would be a double benefit — increased US volumes would lower US prices, while reduced export volumes from China would necessarily bring their prices closer to the US level. Tariffs would be a way to help rebalance the market — but only if linked to a major roll back in US regulation and bureaucracy so that manufacturing is free to invest & produce.
Ever since I saw Cafe Hayek in the blogroll, I’ve been wanting to say something. Because I used to read Cafe Hayek a long time ago, until I realized I was reading the same post over and over again. It always amounted to “tariffs are bad and here’s why.”
The why was always “free trade is better” and “we’re only hurting our consumers by protecting markets because prices will be passed on.”
Then I found this blog and after reading a few posts I bookmarked it, then I found Cafe Hayek on the right side of the screen and took a look after a few years absence. It’s essentially the same old thing, now featuring letters Boudreaux writes, which always include his absurdly long signature at the end.
It got me thinking about tariffs again, and of course about China. What always seems to be missing from Boudreaux’s post is China’s status as our number one global adversary. He only seems to regard them as a trading partner. That experiment, using trade to moderate China, has not worked out at all. Most of the problems facing China are of their own making, but international trade is the crutch keeping that regime upright.
My conclusion is that we absolutely have to think of China as our prime existential threat and act accordingly, which means using every arrow in our quiver to either keep them at bay or topple them without the war that destroys both of us. Tariffs can and have to be part of that. And I know all the arguments against, but here’s mine.
If you had a gun that when you pulled the trigger, a huge bullet shot who you were pointing at but another tiny bullet shot you, wouldn’t you still use that gun against someone who was trying to kill you? While it’s true tariffs can harm domestic consumers, they can really hurt China a lot more. I’m willing to put up with higher prices on some goods so that China suffers, which is a long-term good not just for us, but the world.
Or am I missing something? To me, Don Boudreaux seems either naive or too beholden to his view of economics to understand we’re playing for high stakes, here. In a post last week, he expressed no real preference for president, which seems short-sighted at best and willfully blind at worst. That suggests a certain rigidity and a petulant rejection of trade-offs. Donald Trump may not be the epitome of a free-market capitalist, but any advocate of free markets has to know he’s better for markets and rights than Harris would be. Adhering to principles is great, but this country has several conflicts which threaten us. We have to win them, and if we have to hurt ourselves a little to hurt China a lot, we should do that, even if the staff of the Mercatus Center at George Mason objects.
I think Free Trade is based on the idea that political and business leaders will not muck around with things to create an advantage for themselves. Regulations and tariffs CAN be used to help bring things back to an even keel, but the mucker-uppers are usually the ones controlling those as well. Who will watch the watchers, indeed.
David,
The classic antitrust example would be Rockefeller Oil with deep pockets across the street from Mom and Pop Gas n Go starts a gas war and sells below cost until Mom and Pop goes bankrupt or sells out for pennies to Rockefeller. Rockefeller, enjoying a monopoly in the area, then jacks up prices.
That’s predatory pricing. The consumer may benefit for a short time from the low prices, but in the long run gets screwed. Mom and Pop don’t do too well, either.
Below cost prices from foreign nations may benefit the US consumer over the short run, but the destruction of US sellers can have serious consequences. Tariffs can be used to address predatory pricing from foreign sellers.
It’s foolhardy to limit one’s focus solely on the short-term benefit to the consumer of lower prices from foreign suppliers. Even if we ignore the welfare and unemployment costs which can result.
Finally, there are benefits to political stability. Workers saw the bailouts to the banks. They saw Obama strong arm bondholders to give auto workers billions in bailouts. They got tired of getting screwed coming and going. They weren’t wrong. If the general political will is that the govt is going to bailout those who get harmed by competition, it only makes sense to develop policies that limit the transaction costs on the whole. Those costs when businesses are bankrupted by foreign competition also include mental health, addiction, suicide, crime, etc.
If total costs to society are included, we might need to question whether the consumer is even getting much of a short term benefit.
One problem with tariffs is that it seems almost inevitable that they will be used to benefit industries and companies which are politically favored and/or fashionable. Years ago, Warren Buffett suggested an automatically-operating tariff like system: you get export certificates when you export goods, you need import certificates in order to import goods, and there is a trade in certificates.
https://www.levyinstitute.org/publications/the-buffett-plan-for-reducing-the-trade-deficit
One alternative to tariffs might be a tax benefit for salaries paid to US employees which would exceed the deduction for buying goods from a non-US source. Trump has proposed a lower corporate income tax rate for companies hiring & sourcing in the US; seems possible but complex to define given that most companies do business across multiple geographies.
There was a ‘production tax credit’ in the tax code that went away with the tax cuts of 2017, not sure why, probably just horse trading. I took a brief look at it and it seemed pretty complicates.
David F: ” I took a brief look at it and it seemed pretty complicates.”
That’s the problem with a government dominated by lawyers — everything becomes complicated (i.e. future work for more lawyers).
Reality is that the productive workers in an economy pay for everything, one way or another — income taxes, business taxes, tariffs, unemployment, inflation, societal distress, etc. The best idea on tariffs is to have an across-the-board fairly low tariff on everything — no scope for DC Swamp meddling. As re-industrialization boosts the economy, offset the tariff revenues by reducing other taxes.
Note that to the degree tariffs are successful in driving re-industrialization, the tariff revenue will fall (due to less imports)….maybe partly but not completely offset by tariffs on raw materials that are not available in the United States (although an argument could be made that tariffs on such materials should be very low or nonexistent)
Craig Fuller, who I quoted at the beginning of the post, has been challenged to a debate on tariffs by Professor Jason Miller, who is focused on supply chains. Adequate supply of popcorn is advised.
If you’re on LinkedIn (a pretty dismal platform, really), here is a link in which Miller responds to some of Fuller’s arguments.
https://www.linkedin.com/feed/update/urn:li:activity:7261819801004617728/
Some of us remember the ’60’s and ’70’s where both the auto and steel industry hid behind tariffs to the great determent of both their workers and the rest of the country. The auto makers wised up eventually and for a while but steel rode them straight into the ground. We’re maybe 10 years from having no steel production from ore and fewer than that from having no American controlled major producers. Note that the best selling American vehicles (pick ups) are protected by a 35% tariff.
No one knows if “free trade” will work for the simple reason that it has never, for even one minute, existed. And, I’m willing to bet, never will. It then comes down to somehow balancing all the factors to get the best results for the country. And we all know just how good our government is at doing that.
Trying to learn lessons from actual history rather than pretty theory, here is a relevant recent article by astute economic commentator Martin Hutchinson. History points to the great value the US got in earlier centuries from moderate tariffs — with a big BUT. The US allowed unlimited immigration, which meant that the economic benefits of the tariffs were captured by the elite instead of pushing up workers’ wages. As for the US’s more recent devotion to unilateral “Free Trade”, the money quote is:
“Overall, the United States since 1990 has played the role of late 19th century Britain: the universal sucker whose high-minded globalism allows competitors to undermine its predominant industrial position.”
https://www.tbwns.com/2024/10/21/the-bears-lair-tariffs-high-immigration-robber-barons/#more-9900
The optimum solution would be moderate tariffs, restricted legal immigration, no illegal immigration, and a major roll-back in counter-productive regulations & laws.
The problem with history is that it’s history, not to be repeated. What aspects of world trade are comparable to conditions now from as recently as 20 years ago, let alone through centuries? Over centuries; the British Empire rose and disintegrated, The U.S. went from a scatter of settlements along the Atlantic coast, shipping went from a costly and hazardous undertaking that was only feasible for the most value dense luxuries to the point where something like 80% of all goods travel by sea at some point.
Post WWII, we were the only developed economy that wasn’t dealing with the after effects of thousands of tons of high explosives and millions of casualties. After the initial issue of preventing mass starvation in Europe, trade policy was aimed at reinforcing the allies we hoped would help forestall a Soviet occupation of the rest of the continent. Still hoping. Then there’s lots of people that will tell you that the Smoot-Hawley tariffs exacerbated the Great Depression.
Lots of history, but danged if I see how any of it would apply now.
A couple of days ago I ran across a report on American Reindustrialization from a major brokerage firm. The analyst challenges the commonly-made assertion that the tariffs in the previous Trump administration didn’t have any beneficial effect: he cites data that there was a 5.5% uplift in the US share of foreign direct investment and also a shift of US imports from China-sourced to broader Asia. Also saw some data (not sure if it was that report or somewhere else) that many Chinese firms did in fact reduce prices and accept lower margins in consequence of the tariffs rather than losing the revenue from the US (and the customer relationships, in some cases)
David F: “also a shift of US imports from China-sourced to broader Asia.”
Well, maybe. Apparently a lot of that “shift” involves Chinese goods sent to places like Vietnam and then relabeled as “Made in Vietnam” after minor tweaking. From a National Security standpoint, that kind of shuffle does nothing to reduce US dependence on China’s world-beating manufacturing capabilities. And from an economic standpoint, it is hard to see how the US running an unsustainable Trade Deficit with Communist Vietnam is any better for the US than running that Trade Deficit with Communist China. Until the manufacturing is done back in the US — generating US jobs and US tax revenues — we are just kidding ourselves.
Bloomberg piece on business reaction to Trump’s projected tariffs:
https://finance.yahoo.com/news/more-trump-tariffs-coming-ceos-200001165.html
From the ever reliable Bloomberg: “Trump ratcheted up protectionist threats on the campaign trail because they were a key part of an agenda popular with voters.”
Damn voters! What do they think — that this is a “democracy” or something? Every Bloomberg subscriber knows that the plebs are mere peons, given a “vote” which does not mean anything. Those ignorant citizens should keep their mouths shut and let the Elite take care of things. Look how well that has worked out — for the Elite!