Palmer Luckey, founder & CEO of Anduril, on the importance of US manufacturing.
Warren Buffett had an interesting suggestion for an approach to tariffs: Import Certificates. The idea is that when you export products, you receive import certificates, according to the dollar value of the products exported. In order to import products, you need to provide Import Certificates of equivalent value. And the certificates trade. So the system would be self-balancing.
Buffett suggested this approach in a Fortune article more than 20 years ago, I have no idea if that’s still his view, but I think it’s an interesting approach. The original Fortune article is still online but paywalled, the content can be read without subscription here.
See also my post Trade, Tariffs, and Prices from last November, in which I cited an earlier post:
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. See also the discussion about tariffs and consumer price markups–it’s far from true that it’s always just a simple pass-though.
It is interesting that the same people who are gung-ho for raising income taxes on US citizens are adamantly opposed to tariffs. Yet tariffs are merely another form of taxes. All taxes are ultimately paid by productive citizens. All taxes also have secondary impacts — tax something, and we get less of it. We should choose forms of taxation which have “least bad” secondary impacts. If tariffs can reduce imports and lead to higher domestic production, that may constitute “least bad”.
As to key policy elements: the basic reason the US had high living standards for a time came down to one thing — high productivity. That high productivity was due to a confluence of factors, such as affordable energy, a trained & motivated workforce, and investments in capital equipment. When we have government policies which cripple all three of those factors, declines in living standards are unavoidable. The root cause of all the problems is that “representative democracy” has failed.
So Buffett has proposed carbon offsets, except for tariffs.
So then someone sets up the next Enron to game the market in offset exchange.
And these import certificates can’t be manipulated by con artist countries, as they are doing with other forms of currency exchange?
The certificates would be issued by the US government, presumably US Customs, denominated according to the invoiced value of an outbound shipment. And they’d be collected by Customs from anyone receiving an inbound shipment, and their value would have to equal the invoiced value of that shipment.
And, of course, those invoices are absolutely true and correct. Any one who has ever imported anything substantial from China will have had a conversation, either circumspect, or more probably, matter of fact as to what amount was to be put on the customs declaration. Since that actual route of payment is circuitous, the only way of policing it is through audits. There is no way for the customs inspector to know, except generally, what something was actually worth at the point of entry. The same would be true of exports.
MCS…true of any form of tariffs, though. Probably less of an issue with large companies doing large transactions that are worth auditing. And for public companies, lying about invoice valuations would probably be considered a form of investor fraud.
“In order to import products, you need to provide Import Certificates of equivalent value. And the certificates trade. So the system would be self-balancing.”
The certificates would trade — becoming in effect a form of cash. Importers would have to buy those certificates from someone. In principle, that “someone” would be an exporter, but more likely a financial intermediary. How long would it be before underpaid Customs agents or shady financial intermediaries were issuing certificates to importers under the table at a discount? We have to acknowledge the temptation for corruption would be there. After a few scandals, the process of issuing & trading certificates would become so bureaucratic that it would become an obstacle to international trade. Hey! Maybe it is not such a bad idea after all!
Any document that can be made by humans can also be copied by counterfeiters.
A lot of what Luckey says in terms of manufacturing being the only way to preserve control over our “destiny” is correct. A lot of what he says about the state of manufacturing in the U.S. is flatly wrong. China may be “#1” in manufacturing, subject to all the caveats associated with Chinese economic statistics, but the U.S is still at least #2 which represents an enormous capacity.
Much of that Chinese manufacturing is very unsophisticated. Think Apple phones being assembled by thousands of people at long tables, each attaching a component in a tray full of phones before passing that tray to the next person. Admittedly, you won’t find many operations like that here, at least outside the few remaining sweat shops.
Similarly, when the first Mac Books with the aluminum frames came out, there were a lot of noise about the lines of CNC mills used to produce them. I don’t recall anyone pointing out just how inefficient that process was, Taking a block of aluminum and converting most of it to chips, a little at a time versus using a process like aluminum injection molding that would have produced a near net part that would have required minimal machining. Imagine if Tesla frames were produced by gradually whittling away at a two or three ton block of aluminum. Each would cost millions and take weeks instead of a few minutes with a very minimal amount of machining.
Luckey’s notion that there is some huge pool of Chinese manufacturing engineers that we need to poach is pure fantasy. When you look at the high class stuff coming out of China, you’ll see that all of the critical components, from the processors to the plugs connecting them together comes out of a Western run factory because quality assurance is still a job that Chinese don’t do without someone standing over them. Don’t believe that just because you don’t see daily stories about Chinese EV’s any more that it has stopped happening, they’ve just gotten better at suppressing them. Something the Chinese are very good at.
Stories about Chinese EV’s exploding and burning.
I didn’t take Luckey’s poaching suggestion as specific to manufacturing engineers–there is probably a whole range of poachable skillsets. As far as manufacturing engineers go, I remember Jobs (or maybe it was Cook) telling Obama that we couldn’t make iPhones in the United State because we would need thousands of manufacturing engineers, and that we didn’t have enough to fit into a conference room. I think both parts of this assertion were nonsense: first, I can’t imagine why you would need thousands of manufacturing engineers to make iPhones…the requirement doesn’t scale with volume…and second, because we do have quite a few manufacturing engineers, for example at the auto companies, at Boeing, at the jet engine makers, at Vernova gas turbine in South Carolina, Otis Elevator (also in South Carolina) and plenty of others.
Any document that can be made by humans can also be copied by counterfeiters.
Are T-bills being copied by counterfeiters? If not, then we should be able to make import certificates work without that particular problem. If yes, then we have a problem on another level and we need to fix that before worrying about tariffs.