The Grave Flaws of the Tariff Plan

A non-political explanation of how President Trump's well intentioned plans are paving the road to Hell

Let me start by saying I am registered with neither party and usually vote third party due to my dismay with pretty much all the major two party candidates on offer in my lifetime. Although I am no fan of President Trump, I do support several of his goals, particularly making the US a manufacturing hub again, rethinking our relationship with China, and cutting government spending to rein in our incredibly dangerous debt crisis. In this post I will have to veer into political issues, but will endeavor to remain objective while doing so. My criticisms of Trump's tariff plan would be identical regardless of which party or politician was pushing the plan.

So, what’s wrong with the tariffs? I elaborate below.

The idea is noble

My criticism of the tariff plan is entirely of the execution, not of the idea. The end goal is valiant. Since China joined the WTO in December 2001, US manufacturing has rapidly withered in a way that is unlikely to be a coincidence. China takes advantage of the system in various ways, ranging from currency manipulation to intellectual property theft to unfair labor practices. (Union shops employing free people in the United States cannot compete with a Communist dictatorship forcing people to toil in sweatshops.) From the chart below, it is abundantly clear that something is very wrong:

Low cost manufacturing existed prior to 2001. However, the drop off in manufacturing jobs only started when China joined the WTO. China’s rapid takeover of the manufacture of nearly everything has cost the United States at least five million jobs over twenty-five years. This loss has untold social consequences, hollowing out much of the middle of the country and forcing many people and families into poverty.

The fact is that no country has been economically successful without an industrial sector. The United States cannot operate sheerly by designing products and relying on China to manufacture them—even if the designs are not stolen (and why wouldn’t they be?) the number of jobs created by that system is just not sufficient to sustain a middle class.

So, the fact is that confronting China’s manufacturing dominance and returning some of those jobs back to the United States should be a major priority for our elected officials. Sadly, the prominent plan to do that, the tariff plan, has some serious issues.

The math doesn’t work

The main problem is simple: the math doesn’t work. Let us consider a simple hypothetical. Let’s say a product’s unit cost to make in a Third World country is $10. And let us say that its cost to make in the United States is $12. If a 30% tariff is slapped on the Third World country, the plan will be a success: rather than pay $13 to manufacture offshore, the producer will shift production back to the US and pay the $12. Costs might go up for consumers, but these will be offset by the creation of new jobs in the United States.

The problem is that the actual numbers don’t resemble the example. The US cost might be $12, but the Third World cost is far lower—$3 or $4, maybe $5. US manufacturing employees make, on average, about $30 an hour. Workers in China and Mexico make under $10 per hour. Tariffs can’t overcome that disadvantage. Slap on a 50% tariff and it’ll still be cheaper to make the product outside the US, so the intended goal of reshoring manufacturing will never occur.

The problem isn’t just that tariffs don’t fix the issue. They actually make things significantly worse for consumers. If a product’s unit cost is $5 in China, adding a 30% tariff is a significant tax increase that has no other business impact, raising the price from $5 to $6.50. Goods are disproportionately purchased by lower income groups (since the wealthy save, rather than spend, most of their earnings) and so this is one of the most unfair taxes that could possibly be levied.

Ranking by trade deficit doesn’t make sense

Beyond the issues with the tariffs themselves, the Commerce Department’s implementation bordered on the bizarre. A ranking system was used that penalized countries with the highest trade surpluses with us, causing the country with the highest tariff imposed to be not China, not Mexico, not Vietnam, but…Lesotho? In an April piece, I discussed the Lesotho issue at length:

As it turns out, a number of American brands, such as Foot Locker, JCPenney, and Lululemon, source from Lesotho, where workers are paid an average of $103 per month. Since Americans can’t compete with these wages, no reshoring will occur, and instead those $120 shoes will now cost $180, and that extra $60 will be shoveled into the gaping maw of the US government, which surely will find a way to still run an enormous deficit despite the extra revenue. There’s apparently nothing Lesotho can do about this: there’s no way they’ll ever get rid of their $230 million trade surplus with us, because they probably can’t afford very many of our exports.

Expecting Lesotho to not have a trade surplus with the United States is unrealistic. There’s nothing any person, company or government can do to have a lower one—are they supposed to buy $1,200 iPhones with their entire annual salaries? So again, the extra cost of the shoes will hurt lower-income folks while not rebalancing the underlying economic situation at all.

This issue is present with many other countries as well. In my view, if tariffs were going to be imposed, they should have been based on whether that country levies tariffs against the United States. Using trade deficit as a metric is a really bad idea.

We should isolate China, not ourselves

While they still have many structural issues, China has emerged as the top challenger to the United States’ dominance of the world economically and militarily. Their Made in China 2025 project challenged the US directly, and their formidable Belt and Road Initiative linked them financially with dozens of developing countries. As Russia has become increasingly isolated, the world order is almost entirely the US versus China.

The problem with the tariffs is that they don’t build alliances against China, but target every country besides the United States. President Trump has been unashamed of his desire to go up against the entire world from a trade perspective. The problem is that this undermines our alliance with other countries and drives them into the arms of not just China, but the burgeoning BRICS alliance that poses a serious threat to Western economic dominance.

Tariffs work better as a negotiation tactic

This post has outlined why tariffs, in my view, don’t work well as a way of bringing manufacturing back to the US. (I’d be happy to be wrong.) However, a case can be made that President Trump has a different goal: instead of leaving the tariffs in place long-term, he aims to cause short-term pain, by which he can bring countries to the negotiation table. Once they are there, the threats of leaving the tariffs in place permanently will cause them to make changes. For instance, they could lower their own tariff barriers to US products, stop manipulating their currencies, or update their labor or environmental laws so as to level the playing field.

It’s my firm hope that the administration uses the tariffs this way instead of as a long-term policy move. If so, there is a chance that they cause the negotiations necessary to re-balance the byzantine and unfair system of world trade. But if the tariffs are left on for long periods of time instead, they risk hitting the poorest people in our country the most and not leading to any real change in our industrial landscape. Let’s hope that doesn’t happen.