The general premise of tariffs is that a foreign product costs e.g. $100 whereas a domestic product costs $120. If you then put a 50% tariff on the foreign product, it would cost $150, and then people would prefer the domestic product and only be paying 20% instead of 50%. Moreover, they might prefer the domestic product in general (e.g. higher quality and/or patriotism) and only buy the foreign product if it's actually less expensive, and then the foreign manufacturer would have to lower their price from $100 to $70 so that the tariff only raises the price to $105 because any higher price than that and they lose the business.
The result, in theory, is that you would pay $5 more rather than $50 more. Meanwhile the government collected $35 in tariffs on the foreign product, $30 of which came from the manufacturer rather than you, and that allows the government to lower your other taxes by $35 at the same level of government spending and borrowing.
There are essentially two things required for this to work in your favor on net: 1) the tariffs cause the foreign manufacturer to lower their pre-tariff prices at all, and 2) the government uses the tariff revenue instead of some other taxes they would have collected directly or indirectly from you, so that your net tax burden stays the same. It can also be some mix of these, e.g. the foreign manufacturer lowers their price by $10, you pay $15 in tariffs and get a $10 reduction in other taxes, and then you're ahead by $5.
Ironically, the primary way domestic taxpayers end up paying more is if the tariffs succeed in causing people to buy domestic products, because then there is no tariff revenue on the domestic products and people pay the higher price for the domestic products without a reduction in other taxes.
There's a third requirement which you've glossed over somewhat: a domestic manufacturer of that product needs to exist. For many of the products which are currently the subject of US tariffs, domestic manufacturing is nonexistent, or is itself impacted by tariffs on imported materials.
> a domestic manufacturer of that product needs to exist.
It doesn't have to currently exist. If the tariff causes it to cost less to make it domestically to avoid the tariff then companies start making the product domestically, which is kind of the point.
That doesn't really work in situations where the industrial base doesn't exist for local manufacturing, and where building that would be likely to take much longer than the tariff will be in place (to say nothing of the costs).
The example I used in a sibling reply - LCD manufacturing - is a perfect example. Existing companies can't simply start producing those on a moment's notice - building the necessary facilities would take years, and would likely require a $1B+ investment. It's extremely hard to justify that when it's likely that the tariff situation would change before production even started, let alone before the costs were recovered.
> That doesn't really work in situations where the industrial base doesn't exist for local manufacturing, and where building that would be likely to take much longer than the tariff will be in place (to say nothing of the costs).
a) There isn't actually a time limit on how long you can impose the tariffs. Nothing is preventing the next administration from continuing them if that's what's necessary to make it happen.
b) What about all the things where domestic production can be spun up more quickly?
> Existing companies can't simply start producing those on a moment's notice - building the necessary facilities would take years, and would likely require a $1B+ investment.
Apple by itself has a hundred times more cash than that sloshing around, to say nothing of the rest of the industry.
> It's extremely hard to justify that when it's likely that the tariff situation would change before production even started, let alone before the costs were recovered.
A lot of this is just sensible hedging. If building a domestic factory would require a price of $120 to have a sensible risk-adjusted return and China is selling for $100, you don't do it. But that's the sale price, not the unit cost. The unit cost might only be $50, you just need $120 to cover the initial investment and a competitive return.
If tariffs increase the sale price to $150, now it's profitable to build the domestic factory. Then if the tariffs continue you make a lot of money. If they go way, well, now you're selling something it costs you $50 to produce for $100 instead of $150 and it takes you longer to earn back your investment capital. That's not as profitable, but it's not like you're out of business. Which makes it a sensible bet to do it -- if the tariffs continue then you make out like a bandit and if they don't, your returns are only slightly below market instead of being well above, which isn't actually that much downside risk.
I don't know about "only created in one country", but there are certainly products which are only made in a few countries. One example is LCD and OLED panels - virtually all are made in China, Taiwan, and South Korea. As far as I'm aware, there is no large-scale fabrication of these parts in the Americas or Europe.
There is hardly anything that is made domestically in the US. So the premise falls apart almost immediately. This premise works great for India where domestic production exceeds exports by massive margins and the economy depends mostly on domestic economy. It does not work for US where there is hardly any domestic production and is totally import driven economy.
The US has the second largest manufacturing base in the world after China. It's larger than India and is even slightly larger than the EU. It used to be the largest. Moreover, if the premise is that you're trying to bring back manufacturing capacity, it doesn't matter if something is currently made in the US, what matters is what it would cost if it was, because a tariff in excess of the difference would then make that cost effective.
Obviously in the latter case you would then have to wait until that manufacturing capacity comes back online, but "customers switch to a domestic product" isn't the only thing that can cause foreign manufacturers to have to lower prices. They could also switch to substitute products or reduce consumption and then foreign manufacturers would still have to lower prices to limit the extent to which that happens.
> The US has the second largest manufacturing base in the world after China. It's larger than India and is even slightly larger than the EU.
Of only end products. The "largest manufacturing base" is misleading when majority of inputs for your finished goods are dependent on imports.
> it doesn't matter if something is currently made in the US
It definitely does matter. The right way to have gone about this was to first build the manufacturing capacity in US before imposition of tariffs. It was done in the reverse, which led to US revealing its hand too early, allowing for rest of the World to re-calibrate and start the process of de-dollarization.
> foreign manufacturers to have to lower prices. They could also switch to substitute products or reduce consumption and then foreign manufacturers would still have to lower prices to limit the extent to which that happens.
It won't happen. There is no reason for exporters to lower prices when tariffs only set a new normal. Once the prices have gone up and consumer spending has stabilized around those jacked up prices, that will set the benchmark. Just study history. No product has been devalued due to any contingent circumstances unless the product itself becomes obsolete. Here you are not talking about novel products being developed and manufactured that will obsolete something popular. You are talking about bringing back manufacturing of nuts, bolts etc. Things that are critical and have an already established price in the market that will only go up higher in price once manufacturing moves to US eventually. Rest of the World will adjust to the new higher price.
> Of only end products. The "largest manufacturing base" is misleading when majority of inputs for your finished goods are dependent on imports.
Isn't it easier to figure out how to manufacture screws given steel than to figure out how to manufacture airplanes given screws?
> The right way to have gone about this was to first build the manufacturing capacity in US before imposition of tariffs.
But what's the incentive to do that if there are no tariffs? You either need a reward for doing it (subsidies) or a penalty for not doing it (tariffs). But the US government is already running unsustainable deficits, so there is no money for subsidies unless you want to pay higher taxes or cut some other spending, and good luck convincing people to do either of those things.
> There is no reason for exporters to lower prices when tariffs only set a new normal.
If China charges $100 to manufacture something that the US would have to charge $120 to manufacture and then you put a >$20 tariff on it, China could keep charging the same prices, but that would make it cost effective to make it in the US. To prevent that from happening they would have to lower the price, and therefore have the incentive to.
Now suppose it would cost $200 to manufacture in the US and the tariff is 50%. Can China just keep the price where it is and make the customer pay $150? The customer has a finite amount of money, so if they did then the customer would buy a new phone every six years instead of every four years. Meanwhile the $1000 phone just became cost effective to manufacture domestically, because 50% of that is more than the $100 increase in manufacturing cost, so they lose that business too. What response to this do they have other than to lower prices?
China has a third of global manufacturing capacity (and have to run flat out to avoid deflation due to domestic consumption that will never grow to meet domestic production capacity). Only the unsophisticated could believe the US is going to increase domestic manufacturing capacity at the levels needed to make domestic sourcing superior in some manner. That’s why these tariffs are not grounded in reality.
In three years at the most, these tariffs are done. Cheaper to eat the premium in the short term versus suboptimally invest capital in long duration investments (ie local factories and equipment to fill them). Manufacturing jobs continue to decline, as they have since the election.
> China has a third of global manufacturing capacity (and have to run flat out to avoid deflation due to domestic consumption that will never grow to meet domestic production capacity).
This sounds like the case that they'd end up paying more of the tariffs, because they can neither reduce production nor absorb the output domestically, which leaves lowering prices to try to sustain the same volume.
> In three years at the most, these tariffs are done.
That's not happened the last time. Trump was out for four years and Biden kept a lot of the tariffs.
> Manufacturing jobs continue to decline, as they have since the election.
"Manufacturing jobs" are a talking point but were never really going to happen. The only way the US is actually going to compete is by increasing automation, which doesn't do much for "manufacturing jobs". But it does get the manufacturing into the same timezone as the people designing the products to prevent those jobs from going next, keep the knowhow of production active domestically, reduce dependence on China, etc.
This is a graph showing that construction spending on manufacturing in the US is more than double what it was a decade ago and trending only slightly down from the all-time high in the period trailing when the COVID money ran out and the Fed started to raise interest rates.
While in the abstract and academic sense this is true, in practice there are two big problems that make it an utter non-starter*:
1) Due to the absolutely massive supply chains that have been built up in East Asia (not just China, but many other countries around there), and lack of same in the US, even for products where it's physically possible to produce it all domestically, from the raw materials on up, it would take decades of sustained investment without return before actual consumer products could be made on anything other than a one-off basis. Any step that can't be done in-country gets the tariffs slapped on again. And there are a fair number of raw materials we just don't have, at least not in the kinds of amounts that, um, the entire rest of the world does, that are required for mass production.
2) Trump isn't applying tariffs in a strategic manner to get domestic manufacturing to come back. He's applying tariffs as his personal punishment stick, and to all appearances that's the best he's actually capable of doing with them. In order for any of what I described in #1 to happen, ever, the tariffs need to be applied consistently, predictably, and for a long time.
Trump doesn't want to do any of that. He's just found a magic stick that makes people kowtow to him, and he's going to use it however he pleases.
* Not that I think you're unaware of these, based on your post; to a large extent I'm just expanding upon your second paragraph here.
> it would take decades of sustained investment without return before actual consumer products could be made on anything other than a one-off basis.
That's true of some products, not all of them, or even a majority. And even for those products, well, if it's going to take a long time then we better get started.
> And there are a fair number of raw materials we just don't have
This is again not the common case, and even then it's not necessarily the wrong solution. For example, China currently dominates the production of rare earths and the US doesn't have sufficient reserves, but Australia does, so higher tariffs on China than Australia create an incentive to move mining operations to Australia which breaks China's lock, and creates the incentive to invest in rare earth processing in the US, since then you're only paying the (lower) tariff on the (lower-priced) raw materials rather than the (higher-priced) refined product.
> Trump isn't applying tariffs in a strategic manner to get domestic manufacturing to come back.
This is more of a Trump problem than a tariff problem. If you do something wrongly enough it obviously doesn't work as well as it otherwise might.
> China currently dominates the production of rare earths and the US doesn't have sufficient reserves, but Australia does, so higher tariffs on China than Australia create an incentive to move mining operations to Australia which breaks China's lock
There are "sufficient reserves" (known rare earths in the ground) across the globe and the US absolutely has large reserves.
> to move mining operations to Australia which breaks China's lock
There are already mining operations in Australia delivering raw concentrates in bulk to China. Again, not a shortage of mining operations or a shortage of reserves in the ground.
It's the concentrate processing that China invested time and capital in decades past - every other country about the globe (save for Malaysia, to their regret) figured they'd leave the acres of acid ponds and low level radioactive waste to the Chinese.
Now the US wants Australia to take that on, and that's a deal with the devil for Oz while the current POTUS cannot be trusted to hold up any deal.
I think we all understand how tariffs are intended to work. The problem is that we also know from experience that this is not how they work in practice, and historically are associated with negative economic outcomes overall. The findings described in the article appear consistent with past negative experience.
One correction regarding the tax impact: since tariffs are a flat tax and not progressive, to the extent that they displace progressive income tax, the net tax burden on the average taxpayer would increase, not remain the same.
> The problem is that we also know from experience that this is not how they work in practice, and historically are associated with negative economic outcomes overall.
In general taxes are associated with negative economic outcomes overall, and tariffs are taxes. But displacing other taxes with them doesn't inherently bring a net cost.
> One correction regarding the tax impact: since tariffs are a flat tax and not progressive, to the extent that they displace progressive income tax, the net tax burden on the average taxpayer would increase, not remain the same.
The net tax burden on the average taxpayer would always be the same for any change which is revenue-neutral. Whether the median taxpayer would pay more or less depends on who is buying the things being imported and what the alternate tax system looks like. For example, if the middle class is paying ~20% in practice and the rich pay >30% on paper but <20% in practice, that isn't actually a progressive tax system as implemented. Likewise, if the tariffs are on e.g. phones, but the top quintile buy a $1000 phone every two years and the bottom quintile buy a $100 phone every five years, the tariffs are being imposed on something the rich buy 25 times as much of. Meanwhile things like food and shelter are largely produced domestically.
"The general premise of tariffs is that a foreign product costs e.g. $100 whereas a domestic product costs $120."
The analysis following seems to think that the tariff is placed upon the retail price of the goods as opposed to the production cost, which excludes marketing, final transportation, storage, r&d, domestic staff costs, profit, etc.
A more important aspect not mentioned is getting rid of the de minimis exemption that allowed people to ship stuff tariffs-- free into the US as long as they declared the value less than $750.
> The analysis following seems to think that the tariff is placed upon the retail price of the goods as opposed to the production cost, which excludes marketing, final transportation, storage, r&d, domestic staff costs, profit, etc.
No, it's just using the wholesale price of the product as imported as the basis for comparison. What happens to it after that is unrelated to the tariff and doesn't care whether you paid the same money for a foreign product + tariff or a higher priced domestic product without tariff.
What happens if you avoid conflating cost and price and also assume that pricing is vaguely competitive, rather than cartoonishly favorable to tariffs?
Assuming that pricing is vaguely competitive is conflating cost and price, since competition would cause margins to be thin. The general issue is that domestic production often has a higher cost, e.g. because domestic labor is more expensive, or because foreign production has already amortized some long-term fixed costs over past sales that a new domestic manufacturer would yet have to recover over future sales. It then needs a higher price, at least temporarily, in order to be competitive, which is what tariffs do.
The general premise of tariffs is that a foreign product costs e.g. $100 whereas a domestic product costs $120. If you then put a 50% tariff on the foreign product, it would cost $150, and then people would prefer the domestic product and only be paying 20% instead of 50%. Moreover, they might prefer the domestic product in general (e.g. higher quality and/or patriotism) and only buy the foreign product if it's actually less expensive, and then the foreign manufacturer would have to lower their price from $100 to $70 so that the tariff only raises the price to $105 because any higher price than that and they lose the business.
The result, in theory, is that you would pay $5 more rather than $50 more. Meanwhile the government collected $35 in tariffs on the foreign product, $30 of which came from the manufacturer rather than you, and that allows the government to lower your other taxes by $35 at the same level of government spending and borrowing.
There are essentially two things required for this to work in your favor on net: 1) the tariffs cause the foreign manufacturer to lower their pre-tariff prices at all, and 2) the government uses the tariff revenue instead of some other taxes they would have collected directly or indirectly from you, so that your net tax burden stays the same. It can also be some mix of these, e.g. the foreign manufacturer lowers their price by $10, you pay $15 in tariffs and get a $10 reduction in other taxes, and then you're ahead by $5.
Ironically, the primary way domestic taxpayers end up paying more is if the tariffs succeed in causing people to buy domestic products, because then there is no tariff revenue on the domestic products and people pay the higher price for the domestic products without a reduction in other taxes.