trade wars

Recently President Trump announced plans to impose tariffs of 25% on imported steel and 10% on imported aluminum, citing national security reasons.  He followed this up with a Twitter comment that, for the US, trade wars are good–and easy to win.

My take:

–much of modern economics stems from study of the causes of the Great Depression of the 1930s.  The key factors:  the wrong fiscal and monetary response, world wide; and the imposition of tariffs to “protect” local industry.  These did substantial economic damage, deepening and prolonging the global slump instead.  The idea that Mr. Trump may not be aware of this is the really worrisome aspect of the current situation.


–the first-order effects of the proposed tariffs will, in themselves, likely be miniscule.  Domestic prices for both metals will rise.  As a result of that, and of possible tariff payments to the government, income will shift from the users of the two metals to Washington and to domestic producers of steel/aluminum.  Because of this, at least some metal fabrication will shift away from the US to other countries.  One EU-based maker of appliances has already suspended plans to increase its manufacturing capacity in the US.

–second-order effects will likely be larger.  The EU, for example, is indicating it will retaliate by placing large tariffs on several billion dollars worth of goods that it imports from the US.   Presumably, other affected countries will do so as well.


–there was a similar incident during the Obama administration involving Chinese-made truck tires.  Economists estimate that it resulted in the loss of 3,000 American jobs.  If there was anything good about that situation, it was that it was isolated–Washington understood this was a one-off payment to a domestic union for its political support.  Today’s concern is that, despite overwhelming economic evidence to the contrary, Mr. Trump actually believes that trade wars are good–and will continue to act on that belief.



how do tariffs affect selling prices?

The purpose of tariffs on imported goods is to discourage their use and to encourage the development of domestic substitutes.  It sounds good in theory but may not work in practice.

A recent example of the latter is the imposition of tariffs by the Obama administration on truck tires imported from China.  The tariffs made the Chinese tires affected noncompetitive in the US.  But US tire makers regarded this market as not lucrative enough for them to enter.  So trucking companies began to import more expensive tires made in Thailand.  Economists estimated at the time that because the tariffs raised the cost of doing business for truckers it lowered their profits and overall cost the country about 3,000 jobs.  And then, of course, China retaliated by placing an import duty on poultry source in the US, hurting that industry as well.

The key points:

–tariffs raise the cost of doing business for the industries affected.  That extra cost must either be absorbed by the buyer of imported materials or passed on to the customer.  Theory says that if the end product is unique, the burden will be mostly borne by the end user;  if it’s a commodity, the importing company will have to absorb most of the extra expense.  An interesting case in this regard is toys.  Most of the toys bought in the US are made in China.  A tariff on run-of-the-mill imported toys (which probably means 90% of them) would mostly raise the price to consumers, in my view.

–tariffs may not promote domestic industry, and may do significant net damage, as the truck tire example shows.

–in addition, decades of protection against foreign competition did little to protect US carmakers from the long-term threat of imports.  On the contrary, Washington’s protective umbrella shielded shoddy manufacturing and lack of innovation that ultimately ended with two of Detroit’s Big Three declaring bankruptcy.  To be sure, government action forced foreign carmakers to establish manufacturing operations in the US.  However, the sad case of General Motors, which controlled 40% of the US cara market at one time, makes it hard to argue, I think, that government protection of domestic industry against foreign competition is the best thing to do.


tires vs. chicken feet: the final judgment (almost)

tires vs. chicken feet…

A little less than three years ago, I wrote about a tariff the administration had just placed on imported tires from China.  The duty, the first of its kind, was imposed under special concessions granted to the US for allowing China to enter the World Trade Organization.  The idea was to give extra time for domestic industries that had prospered under protective barriers to adjust to competition–as if the many years of haggling about conditions for China’s WTO membership hadn’t been enough.

What struck me at the time as particularly odd was that no company in the domestic tire industry had asked for the tariffs. In fact, no domestic player wanted to be in the low-end tire business.   The action looked like payback to a union for political support.  Why this sort of payback still isn’t clear to me.

a basic economic error  

There’s, unfortunately, ample history of such tariff moves to show that they’re always economically disastrous.  Any first-year economics student can tell you why.  Yes, jobs in the inefficient industry may be preserved –though maybe not.  But everyone else suffers by the price rises that ensue.  In this case, less affluent Americans who are struggling the most in a weak economy, and who are the main users of low-end tires, are hurt the worst.  Also, WTO rules allow the country hit by tariffs to retaliate in kind, which means lost sales in other industries.

Two years ago, I wrote that, in a matching shoot-yourself-in-the-foot action, China had imposed tariffs on imports of US chicken feet (and some other body parts).

All pretty silly sounding.   I thought that was the end of the story.

…but no!

latest developments

Rather than trying to cover up the mess, President Obama actually highlighted this embarrassing incident in his 2012 State of the Union address as a signature move to “level the playing field” between the US and China.

In response, the moderate Republican Peterson Institute released an economic analysis of the tires vs. chicken feet dust-up.  Peterson concluded that:

–the tariff raised the price of the affected tires to US consumers by over $1 billion a year

–the resulting decline in purchasing power caused the loss of 3,000+ jobs in the retail industry

–the domestic  tire industry gained 1,200 jobs since late 2009, almost certainly due to economic recovery, not the tariffs.  If, however, we attribute all the job gains (and ignore the losses in retailing) to the tariffs, the cost of saving each job was about $1 million a year

–the countervailing duties caused an annual loss of $1 billion to the domestic poultry industry.

By the way, Chinese imports were mostly replaced by imports from Thailand and Malaysia, not domestic production.

that’s not the worst

Until I read a recent article in the Wall Street Journal, I hadn’t realized that, with help from China, one of the importers whose business was destroyed by the tariffs sued the government.

The company won.  Maybe it won on a technicality, but it won.  A Federal court ruled the tariffs were illegal.  Washington didn’t have the authority to impose them on China.

At the drop of a hat, Congress passed a law specifically authorizing the tariffs.

here comes the bad part   

Congress changed the law, retroactive to 2006.

In a pragmatic sense, it meant the government didn’t have to give the tariff money back.

a scary precedent

Changing the rules after the game has already been played is an action I’ve always associated with deeply corrupt third-world countries.   As a portfolio manager with a lot of experience in developing nations, I’ve (invariably correctly) regarded stuff like this as a signal not to get involved, or to take my money and get away as fast as I could.

in the context of the US, this whole affair is chicken feed,so to speak.

…not so much for the 3,000+ who lost their jobs or for the many citizens paying a lot more for their tires.  But the damage won’t move the needle on overall GDP performance.

I also think the world is writing off the tariffs and the legislation to back-room politics plus mindless pandering to anti-Chinese sentiment.  But the retroactive change to the law has got to make at least some people think twice before making new investments in the US, or to consider shifting elsewhere assets already here.  That’s not good for the economy.