Among his several promises, Donald Trump campaigned on a promise to make our economy the greatest ever. In so doing, he assured us that he would bring manufacturing back to the U.S. and that would provide everyone with “great” jobs. This, he would accomplish by imposing tariffs on countries that were stealing American jobs1 and selling us cheap goods. So how is this working out, and what are the prospects for achieving this great economy?
First, it is necessary to understand that tariffs are taxes2. These taxes are paid by the importers when goods are received at the docks. They are then passed off to distributors who pass them off to retailers who, in turn pass them off to customers. In short, customers pay those taxes indirectly through several middlemen. The bottom line is the price paid by the consumer is now higher than previously by an amount equal to, or greater than3, the tariff.
At this point, it is important to understand that the tariff is not collected from the shipper or the manufacturer or the country of origin, but must be paid by the importer who pays the money out of pocket directly to the Treasury and then passes the cost off to the distributor and so on. It does not hurt the manufacturer or the country of origin. It is a tax passed off to you (possibly with profits attached).
So how does this help Americans? In the short term, it doesn’t – in fact, it hurts the American consumer. The theory, however, says that it will help Americans in the long run because it raises the cost of products to a level that American manufacturers can begin produce products of equal quality for the same price or lower. That will increase the number of manufacturing jobs which typically pay more than service jobs. Isn’t that great? All we have to do is wait until all this happens and we have the greatest economy ever.
How is it likely to turn out? It is possible that it could happen according to the theory, but let’s consider what’s happening on the ground.
First, to bring back manufacturing jobs, you need to have factories. We used to have factories, but has anyone looked at the abandoned factories we use to have? By today’s manufacturing standards, they are totally unusable, so we will have to build new factories. To do that will require purchasing land (the old factories and properties were mostly sold off). In addition, new tools will have to be acquired, and because manufacturing technology doesn’t begin to resemble what it was in 1980, it’s going to be a whole new ball game. To compete, the factories will have to be mostly automated with AI playing a major roll. This will substantially add to the initial investment cost (and minimize the number of workers needed).
To get these factories up and running, it’s going to take at least 2 years, assuming that funding is available, property can be acquired, all regulatory requirements can be met and no legal or political opposition is encountered. (That’s a whole lot of assumptions.) And where does the money come from? Clearly not the government, it is already over $30 trillion in debt. There are a lot of people with a lot of money to invest, but are they willing? The investment cost is very high and so is the risk. What if the tariffs suddenly disappear and cheap foreign goods come back. Can we trust that this won’t happen? It will depend entirely on Donald Trump. But Trump has lied so many times and reneged on so many many deals, are investors going to trust him again? Any prudent investor is going to wait and see. For how long? A year? Two years, before they even start?
Even if we bring manufacturing back to the U.S., there is no guarantee that it will benefit the average worker. Automation and AI are going to minimize the number of jobs in the new factories. They will not employ near the numbers of workers that factories employed 40 years ago. Furthermore, there are no longer any guarantees that factory owners will give up profits to pay good wages to workers.4
In the mean time, American consumers are going to be paying much higher prices which, without an increase in wages, will reduce consumption5 and, in turn cut jobs. Furthermore, it is highly likely that foreign countries will retaliate with tariffs on American goods which will reduce sales of American made goods and cut more jobs further reducing consumption and GDP (and if that persists more than 2 quarters, it’s called recession). In recessions, jobs are lost, incomes go down taking consumption and GDP down further in an ugly spiral until something gives it a kick start (usually government spending).
The bottom line is that these tariffs are likely to hurt us big time; not because the theory is wrong, but because of the way that they were administered, and because Trump and our politicians can’t be trusted.
1 Actually, the claim that foreign governments were stealing our jobs is BS. The reality is that most of the factories set up in foreign countries were set up by American corporations in order to exploit the cheap labor in those countries. This was enabled by all the free trade agreements primarily enacted for the benefit of American corporations. Needless to say, what started out to benefit American corporations grew into something that benefited foreigners far more than it did Americans.
2 An interesting point is that the Constitution allows only Congress to impose taxes on the people; but since this import tax is called a tariff rather than a tax, the President can impose it. (It’s not what it is that counts, it’s what you call it that counts.)
3 Possibly greater than the tariffs because often times, profits are based on a percentage of cost. When the cost includes tariffs, profit is made on the tariffs as well as the goods. For example, let’s say that a particular item imported from country x costs the importer $100 and there is a 10% tariff on this item. The importer now has to pay $110 for this item ($100 to the foreign manufacturer and $10 to the U.S. Treasury). The importer then marks up the price 10% and sells it to a distributor for $121. The distributor then marks the item up 10% and sells to the retailer for $131.1. Finally, the retailer marks it up 10% and sells it to you (the consumer) for $146.3. Without the tariff, the final price to you would have been $133.1 (importer sells for $110., distributor sells for $121., and retailer sells for $133.10.). The difference you pay is $13.31 which is $3.31 more than the actual tariff.
4 Manufacturing jobs don’t guarantee good wages. Look at the wages and living conditions of workers in the countries selling us cheap goods. Or look back at the wages and living conditions of factory workers in the late 19th and early 20th centuries. It was the unions that provided the bargaining power to the workers that ultimately lead to a middle class with good wages and life style.
5 According to the Bureau of Economic Analysis, private consumption is 68% of GDP (goods: 23%, services: 45%), total government spending is 18% of GDP and private investment is 15% of GDP. Net exports are -3%. Any decrease in consumption without a corresponding increase in investment or government spending results in an overall reduction in GDP.