Tariffs “a problem with no solution?”

August 31, 2019

https://www.cnbc.com/2019/08/30/basic-fun-ceo-jay-foreman-to-keep-production-in-china-despite-trump.html

In the above-linked article, Jay Foreman, CEO of Basic Fun, Inc., the toy company whose most well-known product is “Lincoln Logs,” whines that the tariffs on China have created “a problem with no solution.”  He complains that Trump’s order to American companies to find a new supply chain, preferably in the U.S., leaves him with no good alternatives.  If he moves production to another country, like India, he may soon face the same tariff problem there.  Move production back to the U.S.?  “There’s no labor here,” he says.

“I’m not really sure the American consumer is ready to start making toys in the kind of conditions you might see in factories in India, and there’s no labor here in the United States to manufacture toys,” said Foreman.

In addition to labor condition concerns, Foreman said that moving production to India, for example, is risky because Trump has already criticized that country’s trade practices.

I’m confused.  American consumers don’t make toys, especially in India.  Workers make things, not consumers.  And Indian factories are staffed with Indian workers, not American consumers.  I think he’s saying that American consumers might be turned off if they learned that the toys they’re buying are made in deplorable conditions.  I suspect that the Chinese factories aren’t that much different.

There’s “no labor here?”  What a crock.  The U.S. is awash in labor.  There are still ten million Americans who haven’t been put back to work since the “Great Recession” in 2009.  The only reason that unemployment in the U.S. is so low – 3.7% in July – is that these long-term unemployed have been factored out of the labor force.  This is why per capita employment remains approximately 2% below the pre-2009 level.  It’s the reason that the American economy is able to add 200,000 jobs every month during this period of economic expansion without any effect on unemployment and barely any upward pressure on wages.  The workers seem to appear out of thin air like magic every month.  It’s not magic.  The workers are here, waiting and eager to be put back to work.

Any time some company executive complains that they can’t find workers in the U.S., it’s because they can’t find workers at the wages they’re willing to pay, which is probably minimum wage or even less, if they could get away with it.  Offer $20 an hour, a more reasonable wage for the kind of skilled work required by manufacturing, and see how many workers show up at your door.  The impact on product prices would be minimal, and more than offset by rising wages.  After all, every consumer is either a worker or is supported by a worker.

Oh, by the way, it’s kind of ironic that Mr. Foreman complains that his toys can’t be made in the U.S. when the most iconic toy in Basic Fun’s line-up, Lincoln Logs – a toy inducted into the National Toy Hall of Fame in 1999, is actually made in Maine by Pride Manufacturing for Basic Fun.  And guess what?  American consumers still buy Lincoln Logs for their kids.  No one complains that Lincoln Logs’ manufacturing should be shipped to China so that they can save a few cents.


Trump Tariff Policy and the Risk of Recession

August 21, 2019

Early this month, Trump announced that a 10% tariff would go into effect on September 1st on all remaining imports from China.  (Half of Chinese imports were already subject to a 25% tariff.)  Stock markets plunged amid warnings of a global slowdown, inflation and the possibility of recession in the U.S.  Investors rushed to buy safe-haven bonds, sending the yield on 10-year bonds below that of 2-year bonds, producing the dreaded “yield curve inversion,” which has often been a harbinger of a looming recession.  So the warnings of recession intensified.  Every weaker-than-expected economic report blames the “trade war” and Trump’s tariffs, while every stronger-than-expected economic report – most notably a strong labor market and good GDP growth (the exact opposite of recession) is shrugged off as happening in spite of the tariffs and trade war.  The globalist media is desperately stoking fear of a recession in the hope of creating a self-fulfilling prophecy.

Is there actually a risk of recession related to Trump’s tariff policy?  You bet there is.  But the relationship is exactly the opposite of what economists and the media would have you believe.  Trump’s “slow turkey” approach to the use of tariffs – imposing them only on China – so far hasn’t yielded anything in terms of reducing the trade deficit and bringing manufacturing jobs back to the U.S.  Don’t get me wrong.  The tariffs on China are definitely working – reducing the trade imbalance with China by nearly 25% this year.  But companies aren’t convinced that this is anything other than a blip in U.S. trade policy or that it could extend beyond China.  So, instead of bringing jobs back to the U.S., it has shifted them to other overpopulated nations hungry for work.  It appears that countries like Mexico and Vietnam have been the big beneficiaries so far, where our trade deficit with each has grown by approximately 25%.

Our overall trade deficit hasn’t budged.  In  June (the most recent month for which data is available), our deficit in manufactured goods was $73.1 billion – the 2nd worst figure ever recorded and only $3.6 billion below the record set in December of ’18.

Trump appears to be walking a fine line, taking the “slow turkey” approach to tariffs to avoid roiling markets but, at the same time, not realizing any of the benefit of bringing back manufacturing jobs, leaving the economy dependent on deficit spending to counteract the drag of the trade deficit, making it susceptible to a recession.  It’s a huge gamble.  A recession will doom any hope of a 2nd term and, with it, any hope of sustaining this badly-needed turn in trade policy.