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“In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries”: Chairman-designate of the Council of Economic Advisers.
By Wolf Richter for WOLF STREET.
The proposals by the incoming Trump administrations to levy new and additional tariffs against China, Canada, Mexico, the EU, etc. have unleashed a torrent of anti-tariff nonsense in the media, pushed by globalization-mongers, by Corporate America perennially in search of cheap labor, and by foreign countries that have been riding this big US gravy train.
Now some of the top appointees-designate of the next Trump administration have pushed back against this anti-tariff nonsense, including Chairman-designate of the Council of Economic Advisers Stephen Miran, who said, “In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries.” And we’ll get to them in a moment.
The result of this “one-sided free-trade policy” over the decades has been the gigantic and ballooning US trade deficit (exports minus imports). Exports add to GDP, imports subtract from GDP, and the trade deficit has been a huge drag on GDP, in addition to causing all kinds of other issues, such as the strategically risky dependence of the US supply chains, and thereby the economy, on China’s production. The chart shows the inflation-adjusted trade deficit that is part of the quarterly GDP calculation – the amounts in annual rates being subtracted from GDP.
First some basics about tariffs.
1. Tariffs have two roles: raising taxes (which the US desperately needs); and changing the economic math for domestic production.
2. US “trading partners” have used tariffs extensively to protect and support their own industries at the expense of US production and exports.
3. Tariffs are applied to the cost for the importer. If a big US retailer buys T-shirts by container loads from a factory in Bangladesh that it intends to retail in the US for $9.99 each, and if the tariff on this product is 25%, the importer (the retailer) is going to have to pay 25% in taxes on the cost from the factory. If the factory charges $1 per T-shirt, the tariff amounts to 25 cents.
4. Tariffs are a direct tax on the profit margins of foreign producers and US importers. Whether or not they can charge more for their products without gutting their sales to pass on the tariffs is decided by the market. And if they can pass on a portion or all of the tariffs, it would be a one-time bump.
5. Companies are already charging the maximum amount they can and still obtain their sales goals. If they raise prices to pass on the tariffs, sales may fall. Whether or not the retailer can raise the price of the T-shirt to $10.24 without pulling the rug out from under the desired sales volume is decided by the market, not by the retailer, and the retailer may find that it has to eat the tariffs.
6. US importers may negotiate the purchase price to where the foreign factory eats part of the tariff, in which case foreign producers pay the taxes to the US government.
7. Domestic production reduces transportation expenses, loss of Intellectual Property (a huge issue in China), supply-chain uncertainty and lead times (catastrophic issues during the pandemic), and other costs and risks. Tariffs tilt the balance further in favor of domestic production.
8. Foreign manufacturers can avoid tariffs by producing in the US. All major foreign automakers already manufacture vehicles in the US. In terms of “US content,” Honda models are right behind Tesla on top of that list. Tariffs will further encourage US production, including of components and assemblies.
9. Many producers have cut prices in the US over the past two years, either directly or through incentives to reach their sales goals, including automakers (here) and homebuilders (here). In this environment, they will eat 100% of any tariffs because they cannot pass on any additional costs.
10. Industrial robots cost about the same anywhere. Products can be and are manufactured in the US price-competitively when advanced automation reduces the labor-cost component. Tariffs add some pluses to that math.
What Trump’s economic team is saying about Tariffs.
The top economic appointees-designate of the incoming Trump administration have come out and discussed tariffs and trade policy. The quotes were collected by Seeking Alpha:
Chairman-designate of the Council of Economic Advisers Stephen Miran: “In the real world, we have a one-sided free-trade policy in which America isn’t nearly as protectionist as other countries. Trump’s proposed tariffs could generate some $450B in revenue a year for the U.S. Isn’t it better to tax foreign entities for entering the American market than impose new taxes on American families? We [also] need targeted tariffs to lift such critical industries as defense. The U.S. relies heavily on imports to make the weapons and other material our military needs. This doesn’t make sense.”
White House Senior Trade Counselor-designate Peter Navarro: “We put on significant tariffs on China, steel, aluminum, dishwashers, solar, a lot of increased countervailing duties to stop the dumping [in Trump’s first administration]. We had zero inflation from any of that. It never happened, and it’s the same movie this time. Inflation is a monetary phenomenon, where we run a Federal Reserve that prints too much money, and they do that to accommodate fiscal irresponsibility.”
US Trade Representative-designate Jamieson Greer: “Tariffs can help support U.S. manufacturing jobs in particular, especially to the extent that they’re remediating an unfair trade practice. If you level out that playing field, it makes it so that Americans don’t have to compete unfairly.”
Commerce Secretary-designate Howard Lutnick: “When you’re running for office, you make broad statements so that people will understand you. Tariffs are an amazing tool for President Trump to use, and he understands ‘don’t tariff stuff we don’t make’ and ‘Build In America.’ We can’t sell a Ford (F) or GM (GM) in Europe because there are 100% tariffs. In Japan, [also] 100% tariffs [stemming from the Marshall plan]. How about we say, ‘we are going to tariff you like you are going to tariff us.’ Of course, they’re going to come in and negotiate, and their tariffs are going to come down.”
Treasury Secretary-designate Scott Bessent: “The truth is that tariffs have a long and storied history as both a revenue-raising tool and a way of protecting strategically important industries in the U.S. President-elect Trump has added a third leg to the stool: tariffs as a negotiating tool with our trading partners. Our size gives us market power and the ability to dictate terms – other countries need us more than we need them. We have but to use that power.”
National Economic Council Chair-designate Kevin Hassett: “If you look at the Republican platform, the first listed trade policy is the Reciprocal Trade Act, which takes U.S. tariffs to the levels that our trading partners charge us… What happens to inflation? Well, what’s the next best supplier? What’s the cost ratio between them? And if we bring new stuff to the U.S., what’s the marginal effect of the marginal cost? Don’t forget that the tariff affects the price level when it goes in, not the long-run inflation rate… Basically, it’s a level adjustment.”
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The post Some Basics about U.S. Tariffs, and What Trump’s New Economic Team Said about Tariffs appeared first on Energy News Beat.
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