Just Use Tariffs

April 16, 2021

https://www.fidelity.com/news/article/top-news/202104130705RTRSNEWSCOMBINED_KBN2C01AL-OUSBS_1

The above-linked article is an interesting case study of the challenges involved in bringing manufacturing back to the U.S. The product in question is a semiconductor – a “chip” – that is in such short supply that it has forced the shutdown of some auto production in the U.S. The Biden administration is looking at ways to break our dependence on imported semiconductors.

Oddly, the article begins with what seems to be an American manufacturer – On Semiconductor – supplying chips to to Hyundai in South Korea, perhaps because the Reuters author, Hyunjoo Jin, is herself Korean. You’d think that Reuters could find some American to write about the actual subject of the article – the challenges Biden faces in bringing chip manufacturing back to the states – but apparently they couldn’t. Maybe we first need to begin by bringing news reporting back to the U.S.? But I digress.

Never mind all that. The point of the article is the complex supply chain engaged in delivering a semiconductor chip to an auto manufacturer that could just as easily be General Motors in Detroit as Hyundai in South Korea. The author chronicles the myriad of steps that begins in Italy and makes its way through Taiwan, Singapore and China, just to name a few. So it’s not just a matter of building a chip factory here. It would require a daisy-chain of factories to turn silicon wafers into the actual semiconductor chips. So the Biden administration is faced with subsidizing a whole array of industries to entice them to move manufacturing to the U.S. It’s enough to make your head spin. The article concludes with “Simply throwing money at this does not solve the problem. It is a more complex problem.”

Moving that supply chain back to the U.S. is certainly a very complex problem. Negotiating subsidies with a dozen or more companies to entice them to make such a move would be difficult enough, not to mention expensive for American taxpayers, if that’s the approach that the government is considering. But there’s another much simpler solution – one so simple that it would require little more than the stroke of Biden’s pen. All he has to do is sign an executive order to levy tariffs on all manufactured products from the countries responsible for our twenty largest trade deficits. Each of the countries mentioned in this article as being involved in this supply chain – China, Taiwan, Singapore (a small city-state located in Malaysia) and Italy – are on that list, responsible for our largest, ninth largest, tenth largest and eleventh largest trade deficits respectively.

Here’s what would happen. Eager to mitigate the tariff, GM (for example) would soon move the final step in that process, the manufacturing of the chip, to a new plant in the U.S., perhaps as a subsidiary. Other potential suppliers like Japan, Vietnam, Mexico or others wouldn’t be viable options since they too are on the tariff list.

Next, that new GM chip-making subsidiary, eager to avoid tariffs on its supplies from Taiwan, would soon implement plans to develop a supplier in the U.S. Once established, that company in turn would soon make plans to source its silicon wafers from a new plant in the U.S. instead of from Italy.

The Biden administration, and whatever administrations succeed it, would barely have to lift a finger to make it happen and it wouldn’t cost American taxpayers one penny in higher taxes. Would it raise the price of semiconductors and, consequently, the price of new cars? Sure, but not much. A few bucks at the most. But, in terms of your purchasing power, they’d actually be cheaper when you factor in the upward pressure on wages – your wages – as the result of the demand for labor from this whole new U.S.-based semiconductor supply chain.

There are two elements of a tariff plan that would be critical to making it effective. First of all, by targeting those twenty nations that are responsible for our biggest trade deficits, the tariffs would eliminate from consideration all those grossly overpopulated nations with bloated labor forces who prey on the American economy. When Trump enacted tariffs on Chinese products, suppliers simply moved their operations to some other such country like Vietnam or Mexico. Those wouldn’t be viable options if moving there failed to eliminate the tariffs.

Secondly, the tariffs must be applied to all manufactured products from those countries. Why? Because otherwise, making our autos more expensive would put them at a disadvantage to autos imported from those countries, but not if those imported autos are subject to the same tariffs. For example, suppose that the tariff is 50%. That tariff might raise the price of an American car by 25%, let’s say. But you’d still opt for the American car if cars from Mexico, Japan, Korea, China, Italy, etc. are priced 50% higher. Now we’re not talking about just cars, but every single manufactured product you can imagine. The manufacturing of every one of them would come back to the U.S. since American-made products would then be the cheaper option for American buyers.

By the way, there’s another factor to consider here. If you’re a globalist, you may be turned off by a proposal that seems “protectionist.” But if you are a globalist, you’re probably also a person who’s concerned about the environment. In all of the talk about fossil fuels and CO2 emissions, you never, ever hear mention of the role of the global supply chain in “fueling” the problem. Did you know that the ships that transport manufactured goods back and forth across oceans and around the globe, goods that could just as easily be made locally, burn five billion barrels of oil per year? Think about that. If the Biden administration really wants to have an impact on climate change, implementing this tariff plan is probably the best place to start.


Michigan Throwing in the Towel

April 16, 2009

http://www.freep.com/article/20090415/BUSINESS06/904150404

Today it was announced that unemployment in the state of Michigan jumped to 12.6% in March, the worst in the nation.  Bankruptcy is now almost a sure thing for General Motors.  For Chrysler, it’s more than a sure thing.  It might as well have happened yesterday and there will be no reorganization.  They’ll go straight to liquidation.

Against this backdrop comes this report from “Michigan Future, Inc.”, an Ann Arbor based think tank.  (See the above link.)  The following paragraph is of special interest:

“The decline in autos is part of an irreversible new reality that manufacturing is no longer a sustainable source of high-paid jobs,” the report from the Ann Arbor think tank Michigan Future Inc. states. “The world has changed fundamentally. We either adjust to the changes or we will continue to get poorer compared to the nation.”

“Manufacturing is no longer a source of high-paying jobs.”  I guess somebody forgot to tell China, Germany, Japan, South Korea, Taiwan, Ireland and every other nation that has built a high standard of living using manufacturing as its back-bone.  These are all nations where manufacturing workers are very well paid and receive benefits that are as good or better than any in the U.S. 

So what’s the solution proposed by “Michigan Future, Inc.”?  They want Michigan to become a “knowledge-based economy,” employing the following strategy:

• Build a culture that highly values learning, an entrepreneurial spirit and being welcoming to all.

• Create places where talent wants to live by making public investments.

• Increase public investments in higher education.

• Transform teaching and learning so that it’s aligned with the realities of a globalized world.

In other words, we’re going to retrain everyone to do something else.  We’re going to pump them full of the kind of “knowledge” that the global community so desires.  Have you done your knowledge-shopping today? 

Knowledge is useless unless it’s put to work – primarily for making things.  Oh, sure, I suppose we could train more people to be economists, teaching them 18th century economic theories and other “knowledge” that is now a proven failure.  Or we could train more MBAs to run more hedge funds, operate more off-the-books accounting schemes and design more investment vehicles like mortgage-backed assets and credit default swaps. 

But what “Michigan Future, Inc.” probably has in mind is more software developers.  No doubt, we need people to do the coding that makes our computers work.  For example, consider the period at the end of this sentence.  It took some sophisticated programming to make that dot appear on your screen.  But nobody thinks about everything else that was involved.  What about the sprawling, multi-billion dollar, computer-controlled chemical complex that was required to make the acrylo-butadiene-styrene plastic that went into making that particular key on your keyboard?  Or the injection molding plant that shaped that plastic into the key?  Or how about the enormous boiler and steam turbine required to move the electrons from my keyboard to your display? 

Let’s go back to the subject of auto manufacturing.  Low tech stuff, right?  High school dropouts bolting stuff together, right?  Is that what you think?  Think again.  Think about huge factories crammed full of computer-controlled robotic equipment, and the people trained to design, build and maintain those robots.  Think about the engineering skills and computer applications involved in designing the chassis to crush perfectly in a collision, absorbing the impact while protecting the occupants.  Or just think about the bolts themselves:  the heavy equipment involved in mining iron ore, the steel mill required to turn that ore into raw steel wire or bars, the maching equipment required to turn that bar stock into fasteners with hex heads and perfect thread patterns.  Now think about the engineering and manufacturing that went into making all of that equipment.  Doesn’t sound so simple now, does it? 

Manufacturing is an absolutely essential ingredient to a healthy economy and a high standard of living.  The demise of manufacturing in the U.S. goes a long way toward explaining the steady decline in our standard of living.  The only knowledge that’s in short supply in Michigan and the U.S. in general is the knowledge of the role that misguided trade policy has played in exporting our manufacturing jobs to nations that fully appreciate the value of manufacturing. 

 


Ford’s Premier Manufacturing Plant a Ghost Town

August 4, 2008

My son and his girl friend were in town this past weekend and my wife and I took them to The Henry Ford to take the Ford Rouge Factory Tour.  (Ford’s Rouge plant is the one that builds the F150 pickup.  It’s a vertically integrated plant that even includes blast furnaces and a steel mill.)  If you’ve never taken a tour of an auto assembly plant, it’s really an incredible experience.  To see humans and robots working in unison on a state-of-the-art assembly line to turn piles of sheet metal and thousands of other parts into finished cars and trucks is simply amazing. 

Unfortunately, that’s not what we saw.  The plant was shut down due to lack of demand.  By the time it restarts on September 22nd, it will have been down for two months.  There wasn’t a soul in sight, not even a single maintenance worker taking the opportunity to make repairs.  No re-tooling for new models.  No capital improvements being made.  The assembly line was completely empty – no in-process trucks and no stacks of parts.  Everything was gone, leaving behind a spotlessly clean but utterly silent manufacturing facility. 

The tour still included interesting displays, including movies about the plant’s history and the production process.  So we could at least visualize what takes place there.  But I think that anyone would be disturbed to see such a modern, efficient factory completely idled, and for such a long period of time.  This speaks volumes about the state of our economy.  Believe me, folks, this is no business-cycle downturn.  All of our domestic auto manufacturers are on the brink of bankruptcy.  If they go, they’ll take millions of jobs with them and the entire manufacturing sector of our economy will vanish, dragging down the other sectors with it.  And if the manufacturing sector vanishes, there’ll be no getting it back any time soon as we will have lost all of our technical know-how. 

The time has come to protect our domestic manufacturing capability.  This isn’t just an economic issue.  It’s a matter of national security.


Will the Federal Government Let the “Big Three” Die?

June 19, 2008

As gas prices have soared, SUV and light truck sales, the only thing keeping the “Big 3” (GM, Ford and Chrysler) afloat, have plummeted. These vehicles were the only models still profitable for them, since there was much less market penetration in this segment by imports, although the Japanese were making inroads. The “Big 3” had basically abandoned the market for cars, since it had become glutted with countless models from Japan, Korea, Germany, Sweden and the U.K. This wouldn’t be so bad if the “Big 3” had access to equivalent markets in those countries. With the exception of Sweden, they don’t – not even close. We have given away America’s auto market and gotten nothing in return.

Now we face the very real possibility of total collapse of our domestic auto manufacturers. (Please don’t point out to me that the Japanese, Koreans and Germans are also “domestic” manufacturers now. Assembling imported parts isn’t the same as designing and building parts and finished cars in the U.S.) When I wrote my “2008 Predictions” in November of last year, many probably thought I was overly pessimistic in predicting the bankruptcy of either Ford or Chrysler this year. It hasn’t happened yet, but now both of these and General Motors as well are running on empty. It’s unlikely that all three will fail this year, but the day when none of these will continue to exist is rapidly approaching. And with the loss of these companies will come the collapse of the parts manufacturers, distributorships and thousands of companies that provide them all with services.  Job losses will be in the millions – added to the millions of manufacturing jobs already lost to free (blind) trade. It’s impossible to overestimate the devastating impact this would have on the economy. It would surely tip this country into depression. Not recession. A depression.

Will the federal government stand by and let this happen? Will it try to arrange some sort of bail-out, or help broker deals for the “Big 3” to be bought up by foreign companies or sovereign funds? Who would want them? Daimler is still paying the price for their failed “merger” with Chrysler, and the private equity group (whose name escapes me) who bought Chrysler from Daimler already regrets it.

That leaves the government only one option – protectionism – which could take one of two forms: 1) limiting imports or 2) imposing tariffs on auto imports. The first option would be a nightmare to manage. How would the quotas be allocated between countries and manufacturers? What would happen when models are dropped and new models added?  Prices would rise and the windfall profits would go directly to foreign manufacturers.

The second option makes much more sense. Tariffs would drive prices higher for imports and the market (consumers) would determine which models thrive and which ones fail. The foreign manufacturers would cut their costs and prices to the bone in a vain effort to offset the tariffs. And all of the tariff money would remain in America, increasing federal revenue and potentially allowing for income tax cuts.  But, most importantly, the higher prices for imports would drive customers to the Big 3’s showrooms.  (Yes, auto prices may rise some, but the rise would be more than offset by rising wages as manufacturing jobs rebounded.)  Domestic manufacturers, American workers and taxpayers would all be the big winners.

It’s not as though we’d be venturing into uncharted trade waters. America thrived under these kinds of tariffs from the beginning of our country until 1947, when we signed the Global Agreement on Tariffs and Trade (GATT), turning our backs on the trade policies that built us into the world’s preeminent industrial power. Tariffs are the only thing that can protect our domestic industry from the predation of grossly overpopulated foreign countries, desperate to sustain their bloated work forces by gobbling up our market while all we get in return is access to markets emaciated by over-crowding and low per capita consumption.

Will the next president have the guts to take such measures and reassert America’s right to set our own trade policies? Or will he let the rest of our domestic manufacturing die and throw us a few more crumbs in the form of job training programs, extended unemployment benefits and more “economic stimulus” checks?

We’ve been locked in a global trade war for decades and have been losing badly because we don’t have the will or good sense to even put up a fight. Will the demise of our domestic auto manufacturing be the final battle in a lost war, or will this battle be the turning point?  Time will soon tell.