Now that tariffs are in the news headlines every day I’d like to offer a few comments. The President says that tariffs will encourage US manufacturers to increase output because foreign competitors’ products will cost more (due to the imposed tariffs). This is—at best—a very long term strategy. US companies require 3 to 5 years to build new plants. And if additional production can be accomplished with just another shift of workers—that will require hiring and training new “recruits”, establishing internal procedures, etc.—probably a one year process for most companies. But the real issue comes into focus when we examine this strategy in terms of the costs we are competing against. Example: US automakers that are competing against foreign car makers pay about $5,200/month in wages to the United Autoworkers union members. Compare that cost against the two foreign sourced auto makers who sell 42% of autos in America. Mexico has a monthly wage of $315 and represents about 23% of imported autos. Japanese auto imports account for about 19% of US sales and their workers earn about $1,300/month. (Source: Picodi survey, 2023) The labor cost picture gets really ugly when the cost of US employee benefits (medical plans+) is added to US auto workers’ wages. So, simple arithmetic clearly discounts the impact of tariffs. Nearly half of all foreign autos sold in the US have an average labor cost component of about $760/month vs. $5,200/month for US auto workers. And this is only the auto industry. Consider clothing, tools, appliances, etc. Discouraging cost comparisons apply in those cases as well—they may even present a greater cost differential.
Now let’s imagine that we can somehow survive the time span needed to build, hire, train and bring on-line additional US workers in the manufacturing sector. What’s the best we can hope for after one to two years of our wait? Well, US workers enjoy a much higher standard of living than foreigners so we can expect to pay much higher labor costs for US-manufactured products—leading to significantly higher inflation. Then we need to add the ever increasing cost of medical plan coverage to the mix—currently growing at 6% to 9% annually. Bottom line: in roughly 18 months (or longer) all we will have achieved is guaranteeing that we will pay much higher prices for any product we forced into US production via tariffs.
US manufacturing currently represents about 10% of our Gross Domestic Product. The rest of our GDP is considered “services” or other than manufacturing. This 10% has been shrinking as foreign manufacturing has matured in countries like India, Mexico, Japan, Pakistan, South Korea, Taiwan and others. As those countries experience their own industrial revolution and learn how to produce quality products at much lower costs than those in the US, we have—with our purchasing decisions—chosen to buy from foreign-sourced manufacturers. Look at the number of foreign autos the next time you stop at an intersection. And—because products are exported (not “services”) — we have a growing unfavorable balance of trade, meaning we constantly increase our reliance on foreign made products. Our standard of living is so much higher that foreign products can be made thousands of miles from America, shipped here and still sold for less than we could make them here. And the 100% tariff rate will not change that result. Now imagine what disrupting that routine will cause.
Final thought: all the tariffs accomplish is a tax increase on all Americans consumers. That cost—no matter how you try to dismiss it as an “importers’ cost” or a “retailers’ cost”– is coming out of your wallet. It’s true that more US manufacturing will eventually mean more US job creation. But that also means that ALL Americans will pay artificially higher prices for every item they purchase. Is this progress?
I’ve tried to keep my comments out of politics but it is necessary to reflect that during the Biden Administration we were comfortably in the 2% to 2.5% inflation range and the numbers were slowly decreasing. (Even the Federal Reserve Open Market Committee acknowledges this as fact.) But, since the infliction of tariffs the Consumer Price Index is increasing beyond that level. Purchasing power is dropping; major employers have announced layoffs; unemployment claims are on the rise and new job creation numbers are less than impressive—even if you include previous corrections.
For years, free trade and specific trade agreements have followed the “water seeks its’ own level” theory by allowing each country to produce and sell what it does best in the world market. Tinkering with that model approach has always produced short term problems. And now, with the universal on-again/off-again tariff policy we are following, disruptions multiply. But the arithmetic says plainly that even if the tariffs cause foreign prices to double or triple the disparity between US and foreign country labor cost inputs will still allow foreign manufacturers to out compete whatever and whenever US makers can duplicate the same products. Meanwhile we, the taxpayers, pay $30 billion/month to our Federal government for a policy doomed to failure–unless, of course, you want the money to build a $300 million ballroom or retrofit an airplane for $600 million.
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