Trade

Tariffs

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…a few quick notes.

The US reciprocal tariffs announced by Trump yesterday are not based simply on the other’s countries’ tariffs for imports of US goods; rather, they attempt to also factor in the effect of currency and of non-tariff barriers. The way the numbers were actually determined is based on a simple algorithm driven by relative trade flows.  Flexport CEO Ryan Petersen explains how it works.  Here’s some detail from the US Trade Representative.

Also from the USTR, a very long document containing a country-by-country analysis of non-barriers faced by US imports.

Interesting post from a guy whose company builds machine tools in Japan:

I’m on the machine builder side of the equation, out of Japan. Looks like our product is going up 24% in price (we’ll probably absorb some, but machine tool margins are not astronomical).

We do production machines. Our biggest single customer is Apple, so when you need 100,000+ of something, you call us. If this was just a Japan trade war, we would be boned…

But it isn’t. My books were already full of projects coming back from China. Small companies with big, commodity (500k+ unit) volumes, and we were already showing that you *can* do stuff in the US at a competitive cost with good process design, smart machine selection, and existing automation. This market will be able to absorb a 20% equipment price increase, and still come out way ahed compared to building their product oversees (not just China, but bejesus… overseas *anywhere*).

So short term, this is gonna suck… but the future was going in a direction of unlimited downside, and if this is what it takes to swing that into long-term health? So be it – all of the people saying this is insanity seem to be clinging to a status quo that everyone with eyes could see is headed towards disaster – they have no better answers.

 

 

 

Manufacturing versus ‘High-Tech’….Really?

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In yesterday’s WSJ, Phil Gramm and Don Boudreaux predictably argue for free trade and against tariffs and say:

We are today taking actions to protect manufacturing jobs the same way we did with agriculture a century ago. In the process, we are imperiling our access to the world market in high-tech and AI, which are the economic future.

I have often seen this assertion of a polarity between manufacturing (old, boring, low growth and low margin) and ‘high tech’ (new, cool, high growth and super-profitable) and wonder what the writers think ‘high-tech’ exactly IS.

Would they consider Taiwan Semiconductor Manufacturing (market capitalization $758B) as high-tech? It is certainly a manufacturing company!

How about ASML Holding NV (market cap $274B)?…this is the only company in the world that manufactures the Extreme Ultra Violet machines which are essential for making the highest-performance semiconductors.

Consider GE Aerospace, now trading as a separate company with a market cap of $206B. It may lack the Cool factor of the above two companies, but anyone who thinks that making jet engines doesn’t count as ‘high-tech’ should read this article: Why it’s so hard to build a jet engine at the Construction Physics substack.

The above examples are companies that sell business-to-business rather than to consumers.  For a business that sells to consumers, look at Tesla–there are many articles and videos available about this company’s innovations in manufacturing. (Here, for instance)

What, exactly, do Gramm and Boudreaux, and similar writers,  think ‘high-tech’ actually means?

Personally, I’m not particularly fond of the term, nor even of just ‘technology’ when used in a narrow and restrictive sense–I think it’s pretty odd to consider a company that sells some garden variety consumer product online (with sparkly AI algorithms!) as being ‘technology’ while excluding the making of jet engines (or power turbines) from that category.

One point that is not well enough understood: process innovation is as important as product innovation.  The manufacturing innovations of Matthew Boulton and John Wilkinson were as important for the success of the steam engine as were James Watt’s design innovations. In the case of the Model T Ford, the process innovations which allowed production at low and continuously-declining cost were perhaps even more important than the design of the car itself.

The idea of a polarity between ‘High-Tech’ and Manufacturing is unhelpful to clear thinking about policy.

Trade, Tariffs, and Prices, continued

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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.

Trade, Tariffs, and Prices

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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?

Two Views on China

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Yesterday, Aron Sarin published an article at Quillette titled   Beijing in Retreat.    Also yesterday, Barrons published China’s Comeback is Getting Started.   (“Stocks Soar as China Revs Up its Reopening” in the print version)   You can read the Quillette piece for yourself, and should, but the Barrons article will require a subscription.

To summarize, the Quillette piece focuses on China’s birthrate deficit (likely to be exacerbated in the future by the memory of the bad treatment of pregnant women during the lockdowns, as well as by a pervasive feeling of gloom about the future)…China’s inability to manufacture high-end semiconductor chips…pervasive corruption…and the fact that in the modern world…the persistence of poverty….and declining trust in the CCP.   “The Chinese people learned that they can enjoy no certainty about the future and that Xi’s obsession with order leads, paradoxically, to chaos.”

The tone of the Barrons piece is rather different:

The catalyst is clear.   Policy makers in the world’s largest economy are pulling out the stops to revive the economy and get its 1.4 billion people spending more, after three hard years of stringent Covid restrictions and harsh crackdowns on technology and other industries.   Beijing has totally reversed its zero-Covid policy and had begun loosening regulations on business.   Up next: more stimulus to stabilize the residential property market.   “Domestically, all the switches that can be switched on have been moved toward growth, and there’s a lot of momentum behind it,” said David Semple of the VanEck Emerging Markets fund.    

(I’m reminded of Shakespeare’s passage in which Glendower says, “I can call spirits from the vasty deep,” to which Hotspur replies, “Why, so can I, or so can any man;   But will they come when you do call for them?)

Various metrics are cited to suggest a recovery: Subway traffic across 23 cities has returned to prepandemic levels, hundreds of millions are traveling for the Lunar New Year,   Citigroup analysts expect the domestic travel industry to recover to more than 85% of pre-Covid levels by the second half of this year.

The article notes that China is a formidable rival to the US in the ‘renewable energy’ sector, given its strengths in battery technology and rare-earth minerals.   It also notes that Chinese policy makers wanting to address the birthrate decline “might offer incentives for couples to have children, such as cash payouts or even making workplace promotions conditional on having a child.”   (Future conversation: “Mommy, why did you and daddy decide to have me?”   “Well, son….)

Abhay Desphande of Centerstone seems less optimistic about China’s future than many of the other individuals quoted:   “Xi is boxed in with multiple policy failures with his gambits with the US, his approach to the private sector and real estate, and people angry i the streets.   One lever he can pursue very aggressively is the economic lever to get people working,   get the economy going.   And even though he may change his attitude toward private enterprises in a few years, for now, he needs that part of the economy to work.

My question would be whether Xi can really step back from his highly centralizing worldview enough to truly reignite sustainable economic growth, however much he wants to.

China remains, of course, a formidable economic power, and there are many, many important products required by the US and other countries whose supply requires Chinese participation, either for the complete products or for essential components and materials.   Semiconductors are far from being the only items that are essential to the US economy and to the welfare of its people.   And the US economy, especially in manufacturing but by no means limited to that industry,   is being hampered by the worldview of the present administration, which is itself very centralizing in its orientation.

Your thoughts?