Trump’s insane tariff policy (I use the word policy very loosely here) is bound to fail. I say this without knowing precisely what the objective is since he's given a lot of contradictory reasons for suddenly hitting almost every country in the world with tariffs ranging from 145% on China to a flat 10% on most other countries - at the moment. These rates could and probably will change according to which side of the bed Trump gets out of on any particular day. Rates are almost being randomly chosen by the hour. We've been told tariffs are to stop the supply of illegal drugs like Fentanyl, to raise enough revenue to replace federal income tax, to force companies to relocate to the USA or simply as a punishment for ‘ripping off’ America in the past.
But don’t worry about that, the detail doesn't matter, the policy will fail anyway.
First, it’s probably illegal. A group of Conservative lawyers are challenging the law that Trump is using to impose these tariffs by executive order instead of going through Congress. The New Civil Liberties Alliance (NCLA) filed suit the day after “Liberation Day,” which triggered the trade war and has wreaked havoc on financial markets ever since.
In his first term, Trump used the Trade Act of 1974, which allows the US Trade Representative to “impose duties or other import restrictions,” or else to “proclaim a tariff-rate quota on the article.” But this requires Congressional approval. Now he's using the International Emergency Economic Powers Act, of 1977 (IEEPA), as I mentioned on Tuesday, a statute that has never before been used to enact tariffs; indeed, the word “tariff” isn’t mentioned anywhere in the legal text. What that law does do is allow the President - acting alone - to “regulate” an assortment of international economic transactions if the nation is faced with “an unusual and extraordinary threat.”
The NCLA argue the IEEPA doesn't give Trump the legal right to impose any tariffs, let alone the swingeing, market-roiling levels he's hit China and others with. They may succeed. Personally, I can't see the Supreme Court agreeing with Trump.
Next, the US stock market reacted badly last week and came close to triggering a complete meltdown in the financial markets when investors dumped US Treasury bonds forcing up interest rates. Trump caved in and ‘paused’ the reciprocal tariffs on most countries for 90 days while upping those on China to 145%. The baseline 10% tariff was also kept.
The Washington Post calculated that the average US tariff rate had shot up to an astronomical 26.8% on Liberation Day, a figure not seen since about 1900. This is the average across all imports. It was the potential impact of this move on US industry that sparked the sell-off of both US stocks and Treasury Bonds and cause Trump into a tyre-screeching U-turn.
But, that 90-day 'pause' actually resulted in the average US tariff rate increasing to 27%. How come? It was because the tariff on China was raised so much, and China is far and away the largest exporter of goods into America. It is this fact that has contributed to the stock market in America continuing to slide and will probably force another humiliating climb down shortly.
What about forcing companies to relocate? If it did, the policy wouldn't generate billions of dollars to replace federal income tax, since imports would fall significantly and they wouldn't generate revenue for the US government, but is that likely to happen?
Molson Hart, the founder and president of Viahart, an educational toy company. Mr Hart is an entrepreneur who has manufacturing experience in both the USA and China. He says: " These tariffs will not work. In fact, they may even do the opposite, fail to bring manufacturing back and make America poorer in the process."
Why? Mr Molson has a long blog post setting out 14 reasons why the tariff policy won't succeed. This assumes it's being done legally, with Congressional approval and the markets don't collapse. He wrote the post when Chinese tariffs were 54%, a figure he said was far too low to make any difference because costs in the USA were so high. That might change now we've hit 145% but I wouldn't guarantee it.
Among the other 13 reasons there are serious obstacles that are not unlike Britain's manufacturing and productivity problems. Notably, we don't have the skills anymore or the eco-system that allows China to make almost anything using cheap, high-quality components quickly and easily available in China.
But the biggest problem is the attitude in the labour market. This is how Molson puts it:
"Chinese manufacturing labor isn’t just cheaper. It’s better.
"In China, there are no people who are too fat to work. The workers don’t storm off midshift, never to return to their job. You don’t have people who insist on being paid in cash so that they can keep their disability payments, while they do acrobatics on the factory floor that the non-disabled workers cannot do.
"Chinese workers much less likely to physically attack each other and their manager. They don’t take 30 minute bathroom breaks on company time. They don’t often quit because their out-of-state mother of their children discovered their new job and now receives 60% of their wages as child support. They don’t disappear because they’ve gone on meth benders. And they don’t fall asleep on a box midshift because their pay from yesterday got converted into pills.
"And they can do their times tables. To manufacture, you need to be able to consistently and accurately multiply 7 times 9 and read in English, and a disturbingly large portion of the American workforce cannot do that."
This is apart from the lack of infrastructure. The US, for example, hasn't increased the amount of electrical power generated since 2000, while China, over the same period, increased capacity by 400%! That's 5x!. China generates over twice as much electricity per person today as the United States.
Americans don't want to do the menial stuff anyway and don't even think about automation. China installs 7x as many industrial robots as America, robots which are cheaper and maybe better.
Mr Molson says:
"Many are saying that this tariff policy is the “end of globalization”. I don’t think so. Unless this policy is quickly changed, this is the end of America’s participation in globalization."
Quite. It is all doomed to fail
