Some thoughts on tariffs

What is Trump even trying to accomplish with the tariffs? You hear two purposes articulated by his administration and followers. First, that the tariffs are an aggressive, brash opening position in a negotiation that is intended to bring down other countries' tariffs and trade barriers. Second, that the tariffs are in place - "permanently" - to bring manufacturing back to America and to generate revenue.

Those two purposes are contradictory! The first would be a push for freer trade, in line with Ricardian comparative advantage. The second is the inverse of the first. It would reflect a belief that we are losing when Vietnam makes stuffed animals for us less expensively than we can make them ourselves. But anyway, the purpose, logically has to be one or the other, it cannot be both. 

I suppose it could also be the case that Trump is trying to achieve contradictory purposes without realizing it - that would be even worse. But it seems like the best hypothesis is that he has a longstanding dislike of trade per se and wants to have these large tariffs in place "permanently." 

The theory of Cornucopianism helps us to understand the transition away from manufacturing that the United States has made.

Herman Kahn writes about this in The Next 200 Years. As a country or civilization gets wealthier, the focus of economic activity shifts from primary (extractive) to secondary (construction and manufacturing) to tertiary (services) and then to quaternary (post-industrial) activities. 

And as you get richer, the theory of comparative advantage predicts that you would hire people who are not as rich to do physical tasks for you. Such as sewing fabric together. (Labor in Vietnam is even cheaper than in China.) 

You can buy an OCBD shirt made in the U.S. but it is expensive ($255) because people have higher and better uses for their time than making shirts. It's a flex, a status symbol, for your button-down to be made here instead of buying an shirt that's "globally sourced" for only $40.

For a country that has been supposedly "deindustrialized," the United States still produces a huge amount of manufactured goods. We do not make stuffed animals, we make jet engines. Essentially all of the commercial aircraft in the air right now throughout the world - probably 10,000 or more - are using American jet engines or British ones. China still cannot make them. 

Russia is truly deindustrialized. It produces virtually no complex goods for export and, unlike the U.S. does not export any impressive services either. Nobody is buying GPUs or analog semiconductors from Russia. (Imagine creating this chaos with tariffs to punish Vietnam for making us cheap shoes when we have a semiconductor ecosystem like this.)

The sad thing about the tariffs is that even if Trump set about them with the best of intentions and even if they could work in theory, they are not going to work in practice. Molson Hart has a great thread about why Trump's plan is not going to work from the level of an entrepreneur and factory owner. 

But Trump's plan is also not going to work politically.

Instead of attempting to legislate a durable trade policy, Trump tried to dictate, as one man, a clumsy and absurd system to govern the foreign trade of a $28 trillion economy. The problem is that the more arbitrarily and capriciously he acts, the less likely the tariffs are to be "permanent," and so the less likely that anyone would want to make a major investment in manufacturing a product in America that is currently manufactured overseas. 

Trump has blown 2026 (and likely 2028) for the GOP by causing a market crash and recession. The obvious conclusion by anyone with the capital to actually build a factory will be that these tariffs will not be in place long enough for the investment to be paid back.

In fact, Trump might be (and should be) put on a leash much sooner than 2026 or 2028. Senators Grassley and Cantwell introduced a bill (S 1272) that would cause any tariff imposed by the President to sunset after sixty days unless approved by Congress - it already has seven Republicans cosponsoring. So either Congress will get rid of the tariffs now or when Democrats win in 2026 or when a Democrat is elected in 2028. 

It looks like I was wrong to be optimistic about Trump in November. Notice that nothing on that list of things to be optimistic about pertained to tariffs or trade. It was a blind spot in not appreciating that Trump simply cannot grasp the concept of comparative advantage. Romney was correct all along - Trump does not have temperament of a stable, thoughtful leader.