Wednesday, March 7, 2018

How This Will Play Out

Will protectionism protect American manufacturing, or will it do something else?  Stay tuned.

There are some on the far-right who have argued for years that "free trade" is killing off American industry and that we need to enact protectionist tariffs on imported goods.   Well, it looks like their wish is coming true, so we will see how this plays out.   It will not end well.

Why do I say this?   Well, despite what Trump says, trade wars are not easy to win.   In fact, no one wins them, even (and particularly) the people they are designed to protect.   Other countries will enact retaliatory tariffs, which in turn will harm American businesses - particularly the American farmer, who is already suffering the worst farm profits in a decade.   Each step in the chain causes a domino effect, which in turn stifles trade, production, and jobs.

The last trade war we got into was in 1930.  We know how that worked out.

Take for example, this tariff on aluminum.   This will not increase the supply of American-made aluminum, but rather just raise aluminum prices.  As we saw during Obama's tire-wars, when you slap a heavy tariff on imported tires, American tire producers (many of which are foreign-owned, by the way!) just raise their prices accordingly.

So the folks at the Airstream factory, who are exporting expensive all-aluminum trailers to China and Japan, will have to raise prices on their trailers as the cost of aluminum goes up.   This, in turn, makes these trailers even more unaffordable to the average American (they are already staggeringly expensive as it is).    China then slaps a 10% import duty on these trailers (and other American goods) which in turn, drops the export demand.   Not only that, buying an American trailer (or any other American product) is seen less as a status symbol anymore in China, but a betrayal in an era of ultra-nationalism.   This does not bode well for American companies selling products in China, even products made in China.   Does owning a Buick make sense in China, when your country is at economic war with the United States?   Bear in mind more than half of GM's sales these days are in China.

So the Airstream people sell a few less trailers.   They stop paying overtime and running a second shift or whatever.  Their prices have to go up to cover the cost of aluminum.   But the stressed farmer who is already working a second job to avoid losing the family farm can't afford to buy one - he is already in debt up to his eyeballs for that new John Deere tractor - the one made with Chinese sensors that now are double in cost.   The guy who worked at the Harley Davidson factory can't afford one, either.  He got laid off before the trade war started.   And now, Harley's export business is suffering as well, as buying an "American" bike overseas is no longer seen as luxury, but betrayal - and with heavy import tariffs is even less affordable.

It becomes a domino effect.   Companies that compete with imports may see a temporary boost - in profits - as they raise prices across the board.   But they won't be hiring more people to work in the factories as sales actually don't go up.   And eventually, they will drop down, as the overall economy slows down.

So what about the "workers" in these rust-belt factories?   Don't they benefit from this protectionism?   Again, no, as most of them lost their jobs to automation, not to imports.   Yes, GM, Chrysler, and Ford have closed dozens of plants and laid off thousands of people over the years.    Toyota, VW, Honda, Subaru, Mercedes, KIA, Hyundai, BMW, Nissan - and others - have all opened up new plants in that same period of time.   And modern plants of both domestic and "import" makes use far fewer people on the assembly line.   The days when 20-people crowded the spray booths on the Gremlin assembly line are long gone.   They have been replaced by one guy who pushes a button - and four robotic arms that spray cars consistently and exactly every time.

So the idea that this will "create jobs" is utter nonsense.   It isn't going to create jobs at any of the US car companies, as the "foreign" competitors have long ago realized the easiest way around a trade barrier is to relocate to the US - but not to rust-belt Pennsylvania, but to union-free Mississippi.   If any jobs are created at all, they will be in low-wage States.

But wait, it gets worse.   While wages have remained depressed in many parts of the country, one consolation is that inflation has been kept low, and also that inexpensive foreign goods are more affordable to low-wage workers.    You can buy a flat-screen television for less than the price of a pair of sunglasses at the mall.   Wages may be stagnant, but so are prices - and the average American can afford to buy more with those wages.

But two things will happen that will kill this off.  First, inflation, which is already rising, will get worse.   Second, tariffs will mean higher prices for all sorts of goods, all across the board.   We will be right back to the 1970's economy - the stag-flation economy.   Back then, people dialed back their expectations on almost every aspect of life.    No longer were people buying the chromed and befinned monstrosities of the 1950's or the over-powered "muscle" cars of the 1960's.   No, back then, the dream was to be able to afford a stripped-down "simple machine" that didn't even have a glovebox.   Can't afford that?  How about a Vega?

The 1970's were a time of diminished expectations for many folks - despite what you may have seen or heard on "That 70's Show" on TeeVee.   As the economy falters, sales of $70,000 pickup trucks will slow - the other half of GM's "success" story besides China.   Not only that, GM will have to absorb the higher price of steel, while cutting sales prices to move product.   Like I said in a previous posting, GM will go bankrupt - again.

Will anybody benefit from this trade war?   Not really.    A few steel and aluminum producers may reap some windfall profits - initially.  But over time, even those will fade as demand starts to slacken as the overall economy weakens.

Like I said, the problem we have is one guy pulling all the wrong levers.   We were due for a recession or at the very least, a retraction in the economy.   He's turning it into a full-boat depression.

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