An Example of Why Tariffs Can’t be Piecemeal

https://www.fidelity.com/news/article/top-news/201901170104RTRSNEWSCOMBINED_KCN1PB0CB-OUSBS_1

The above-linked article is a good example of why tariffs can’t be applied piecemeal to only specific products.  A Michigan auto parts supplier is shifting the manufacturing of some components from Michigan to Israel to skirt the tariffs on steel.  Israel gets steel tariff-free and the parts they manufacture no longer count as “steel,” so they can export them to the U.S. free of tariffs.

I give Trump a lot of credit for implementing tariffs and hope he goes much further but, in order to avoid situations such as the one reported on in this article, tariffs must be targeted at nations – densely populated nations – not products, and must cover every product from such nations – not just specific products.

If Trump had applied the tariff structure I recommended in Five Short Blasts, a structure indexed to population density, the RoMan manufacturing company would never dream of outsourcing components to Israel, since all imports from Israel would be subject to a 40% tariff.  It’s worth noting here that, in 2017, our third worst trade deficit in per capita terms was with Israel, one of the most badly over-populated nations on earth – three times as densely populated as China.  In per capita terms, our trade deficit with Israel is four times worse than our deficit with China.

The Trump administration sees tariffs as a tool to force concessions from nations that continue to maintain trade barriers (like tariffs) against American products.  It believes that if it can get Europe, for example, to drop its 10% tariff on American cars, then American manufacturers will begin exporting a lot more cars to Europe.  But they won’t, at least not nearly in the quantity needed to offset the number of cars imported from Europe.  The problem isn’t the tariff, it’s the inability of Europeans to consume even their own domestic capacity because their dense population (nearly equal to China’s population density) makes car ownership impractical.

Tariffs aren’t negotiating tactics.  They’re absolutely imperative to maintain a balance of trade with densely populated nations.

 

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