wealth of nations

If high tariffs persuade manufacturers to leave China, they won’t move to the United States. There’s a much cheaper option next door.

When President Donald Trump made good on his promise to be “Tariff Man” this week, he sent economists into a lather, launched the stock markets on a wild and largely downward ride, and thrilled parts of his political base, who saw a president finally willing to use his bluntest policy weapon against America’s biggest economic rival. Trump claims that imposing as much as $60 billion in new taxes on Chinese goods will hurt China more than American consumers. Both are quite likely to be hurt, at least in the short run. But the tariffs have an unexpected beneficiary as well, one that Trump is surely less excited to talk about. In an ironic twist, Trump’s tariffs might make Mexico great again.

The easy, and wrongheaded, pro-tariff argument made by Trump and his fellow China hawks is that when he slaps a tax on goods from China, it will make it less attractive for companies to manufacture there and less appealing for American consumers to buy goods made in China. That will then create an incentive to make more in the United States. So, America wins, right?

Story Continued Below

But the reality is that America and China are both going to lose, and they aren’t haggling in a vacuum. There are dozens of players ready to swoop in to take advantage when two titans start wounding each other.

The entire network of production, with China as an assembly hub for parts sourced globally which are then put together in mainland China and shipped to the United States, has been the product of more than 20 years and trillions of dollars in investment. Changing that isn’t going to happen quickly. Companies can’t just snap their fingers and rejigger their supply chains overnight. The cost of abandoning it is many multiples greater than the amount of the tariffs, no matter who pays them.

Still, China is no longer the low-cost producer globally, even if its infrastructure and expertise in multiple areas of manufacturing are second to none. Just as years of volatile oil prices and vulnerability to the erratic politics of oil led many companies to invest in domestic substitutes like fracking, the uncertainty surrounding American tariffs is forcing manufacturers to rethink their supply chains. Companies are reconsidering China as a primary place to manufacture.

But that has not, however, led those companies to bring factories and manufacturing jobs to the United States. Instead, they’re looking elsewhere for low-cost efficient hubs, to places like Vietnam, Malaysia, the Philippines and, of all places given Trump’s rhetoric, Mexico.

If Trump’s trade war against China does finally disrupt the U.S.-China economic fusion, the main beneficiary will not be American manufacturers. Instead, the winners will be other countries, including one very prominent country that borders the U.S. and that Trump has denounced for its unfair trade deals with the United States under NAFTA. Already, Hasbro and GoPro have shifted production from China to Mexico, along with hundreds of other companies totaling tens of billions of dollars. Other countries that are seeing new investment include Indonesia and Egypt.

Mexico in particular stands to gain because it is easier and cheaper for U.S. companies to relocate manufacturing there than to build new factories elsewhere for the kind of goods now produced in China. Mexico has the infrastructure from years of NAFTA, as well as ease of transport to and from the United States. That isn’t necessarily bad for the United States, but then again, it wasn’t necessarily bad that manufacturing that was no longer economically feasible in the United States went to Japan and Taiwan in the 1970s and 1980s, and then to China in the late 1990s and into the 2000s. And it certainly isn’t what the political proponents of tariffs, both Democrat and Republican, promise will happen.

Faced with such facts, Trump may well be inclined to impose tariffs on everyone, everywhere in the hopes that enough economic walls will force a complete rejiggering of the global economic system and lead to a return of a 1950s halcyon moment when, after the global destruction caused by World War II, U.S. manufacturing accounted for nearly half of all world production. To accomplish even a fraction of that, the U.S. would have to impose tariffs far higher than 25 percent. Tariffs would have to be so high that companies simply could not manage the costs of producing abroad. Only then would it be economically sensible to produce lower-cost goods domestically—at much higher cost than most other countries.

Trump the Tariff Man would need tariffs of more like 100 percent to make that attractive to companies. He probably would support that. Of course, tariffs in excess of 100 percent would wreak havoc on our economy, and would then require, oh, many trillions of dollars of domestic spending to stave off the decimation, help companies build new supply chains and provide a cushion for citizens facing a doubling of the cost of living. One could, in theory, craft a rational argument for just that, for a government-triggered economic revolution, but you’d be hard pressed to find anyone making that case, and very few would ever support it.

Contrary to popular perception, the United States is still a manufacturing behemoth, but it tends to make higher-end goods like automobiles, medical devices, industrial equipment and pharmaceuticals. The U.S. accounts for 18 percent of global manufacturing output, China 20 percent. But because of robotics and automation, U.S. manufacturing requires far fewer workers. And of course, the U.S. also exports a considerable portion of what it makes, and that exporting is also imperiled by a trade war. Tariffs might increase inflation in the United States by making goods more expensive, but even with some onshoring of manufacturing, they aren’t likely to raise either wages or jobs. A factory that employs 150 people and 50 robots will not bring Toledo back.

The best-case scenario is that tariffs will lead companies to alter their supply chains in ways that aren’t overly painful for companies and consumers. But they also will not return or recreate the manufacturing economy of yore, which in any event has already been replaced in the United States by a vibrant, high-end, lucrative manufacturing of today that does many things but does not create large numbers of jobs. China is already focusing more of its manufacturing energies on supplying its own 1.5 billion people and not exporting to the world, regardless of tariffs. It will feel a sting, but its domestic economy has now reached something a break-away point, tariffs or not, deal with the United States or no deal.

This trade war, therefore, is likely to be no more effective than the phony one President Trump waged before he got serious about tariffs. It seems likely that this skirmish will end with both sides declaring some sort of victory. It seems even likelier that those declarations will be hollow, and that the ones cheering will be doing so quietly, south of China’s borders and south of ours.

wealth of nations

If high tariffs persuade manufacturers to leave China, they won’t move to the United States. There’s a much cheaper option next door.

When President Donald Trump made good on his promise to be “Tariff Man” this week, he sent economists into a lather, launched the stock markets on a wild and largely downward ride, and thrilled parts of his political base, who saw a president finally willing to use his bluntest policy weapon against America’s biggest economic rival. Trump claims that imposing as much as $60 billion in new taxes on Chinese goods will hurt China more than American consumers. Both are quite likely to be hurt, at least in the short run. But the tariffs have an unexpected beneficiary as well, one that Trump is surely less excited to talk about. In an ironic twist, Trump’s tariffs might make Mexico great again.

The easy, and wrongheaded, pro-tariff argument made by Trump and his fellow China hawks is that when he slaps a tax on goods from China, it will make it less attractive for companies to manufacture there and less appealing for American consumers to buy goods made in China. That will then create an incentive to make more in the United States. So, America wins, right?

Story Continued Below

But the reality is that America and China are both going to lose, and they aren’t haggling in a vacuum. There are dozens of players ready to swoop in to take advantage when two titans start wounding each other.

The entire network of production, with China as an assembly hub for parts sourced globally which are then put together in mainland China and shipped to the United States, has been the product of more than 20 years and trillions of dollars in investment. Changing that isn’t going to happen quickly. Companies can’t just snap their fingers and rejigger their supply chains overnight. The cost of abandoning it is many multiples greater than the amount of the tariffs, no matter who pays them.

Still, China is no longer the low-cost producer globally, even if its infrastructure and expertise in multiple areas of manufacturing are second to none. Just as years of volatile oil prices and vulnerability to the erratic politics of oil led many companies to invest in domestic substitutes like fracking, the uncertainty surrounding American tariffs is forcing manufacturers to rethink their supply chains. Companies are reconsidering China as a primary place to manufacture.

But that has not, however, led those companies to bring factories and manufacturing jobs to the United States. Instead, they’re looking elsewhere for low-cost efficient hubs, to places like Vietnam, Malaysia, the Philippines and, of all places given Trump’s rhetoric, Mexico.

If Trump’s trade war against China does finally disrupt the U.S.-China economic fusion, the main beneficiary will not be American manufacturers. Instead, the winners will be other countries, including one very prominent country that borders the U.S. and that Trump has denounced for its unfair trade deals with the United States under NAFTA. Already, Hasbro and GoPro have shifted production from China to Mexico, along with hundreds of other companies totaling tens of billions of dollars. Other countries that are seeing new investment include Indonesia and Egypt.

Mexico in particular stands to gain because it is easier and cheaper for U.S. companies to relocate manufacturing there than to build new factories elsewhere for the kind of goods now produced in China. Mexico has the infrastructure from years of NAFTA, as well as ease of transport to and from the United States. That isn’t necessarily bad for the United States, but then again, it wasn’t necessarily bad that manufacturing that was no longer economically feasible in the United States went to Japan and Taiwan in the 1970s and 1980s, and then to China in the late 1990s and into the 2000s. And it certainly isn’t what the political proponents of tariffs, both Democrat and Republican, promise will happen.

Faced with such facts, Trump may well be inclined to impose tariffs on everyone, everywhere in the hopes that enough economic walls will force a complete rejiggering of the global economic system and lead to a return of a 1950s halcyon moment when, after the global destruction caused by World War II, U.S. manufacturing accounted for nearly half of all world production. To accomplish even a fraction of that, the U.S. would have to impose tariffs far higher than 25 percent. Tariffs would have to be so high that companies simply could not manage the costs of producing abroad. Only then would it be economically sensible to produce lower-cost goods domestically—at much higher cost than most other countries.

Trump the Tariff Man would need tariffs of more like 100 percent to make that attractive to companies. He probably would support that. Of course, tariffs in excess of 100 percent would wreak havoc on our economy, and would then require, oh, many trillions of dollars of domestic spending to stave off the decimation, help companies build new supply chains and provide a cushion for citizens facing a doubling of the cost of living. One could, in theory, craft a rational argument for just that, for a government-triggered economic revolution, but you’d be hard pressed to find anyone making that case, and very few would ever support it.

Contrary to popular perception, the United States is still a manufacturing behemoth, but it tends to make higher-end goods like automobiles, medical devices, industrial equipment and pharmaceuticals. The U.S. accounts for 18 percent of global manufacturing output, China 20 percent. But because of robotics and automation, U.S. manufacturing requires far fewer workers. And of course, the U.S. also exports a considerable portion of what it makes, and that exporting is also imperiled by a trade war. Tariffs might increase inflation in the United States by making goods more expensive, but even with some onshoring of manufacturing, they aren’t likely to raise either wages or jobs. A factory that employs 150 people and 50 robots will not bring Toledo back.

The best-case scenario is that tariffs will lead companies to alter their supply chains in ways that aren’t overly painful for companies and consumers. But they also will not return or recreate the manufacturing economy of yore, which in any event has already been replaced in the United States by a vibrant, high-end, lucrative manufacturing of today that does many things but does not create large numbers of jobs. China is already focusing more of its manufacturing energies on supplying its own 1.5 billion people and not exporting to the world, regardless of tariffs. It will feel a sting, but its domestic economy has now reached something a break-away point, tariffs or not, deal with the United States or no deal.

This trade war, therefore, is likely to be no more effective than the phony one President Trump waged before he got serious about tariffs. It seems likely that this skirmish will end with both sides declaring some sort of victory. It seems even likelier that those declarations will be hollow, and that the ones cheering will be doing so quietly, south of China’s borders and south of ours.