Tariffs have become a major issue in the current US election, with former president Donald Trump claiming his plans to put a 10-20 percent tax on imports, rising to 60 percent with China, would fill government coffers for tax cuts and make American manufacturing great again. His rival Kamala Harris called the plans a ‘sales tax on the American people.’
“A tariff is a beautiful thing but it’s got a bad image,” Trump said in a recent interview. “You can stop wars with tariffs.”
Up until the beginning of the 20th Century, tariffs raised a huge amount of government revenue and protected nascent US industries, although the latter might be overstated.
Trump’s argument is that offshoring by manufacturers has robbed Americans of jobs, thus by imposing tariffs, US manufacturers will be forced to bring those factories home, and foreign competitors will be priced out of the domestic market. Some find this theory dangerously optimistic.
On the technology front, there is more gloom than optimism, however, since some key parts of the technological supply chain aren’t made in the US at all and there’s little prospect of that changing any time soon.
“Trump’s first wave of tariffs didn’t touch consumer electronics, cell phones were not taxed, laptops, or desktop. But these are, especially for China,” Mary Lovely, senior fellow at the Peterson Institute for International Economics, told The Register.
“So people will feel that that’s a big tax – 60 percent – and the electronics makers are not able to source completely away from China for some other things, or even majority of them. They’re going to get hit very, very hard.”
Not everyone will be hit as hard. Samsung gets most of its parts and labor sorted out in South Korea, but even they have third-party suppliers from China, she pointed out, while countries like Vietnam can’t match China in scale.
Born in the USA?
Earlier this month, the US Consumer Technology Association issued an alarming report that gamed out how the proposed tariff regime would work in practice. The results were alarming.
The industry association, which also produces America’s biggest technology trade show CES, is predicting that Trump’s plans will cause havoc in their industry.
The CTA predicts [PDF] that the increased cost of importation, and retaliatory tariffs from other countries, would raise the cost of a laptop by 46 percent, a gaming console by 40 percent, and smartphone prices would be 26 percent more expensive. As a result, the association expects demand to fall 54, 57, and 44 percent, respectively.
“At their core, these proposals are tools for the US government to grab as much tax revenue as possible from the American people,” said CTA CEO Gary Shapiro. “The proposed tariffs will not create more employment or manufacturing in the US. In fact, the opposite may happen where our productivity decreases and jobs may be lost over time when workers and businesses have less affordable access to technology.”
The report points out that, for example, in the case of smartphones, there is virtually no manufacturing capability in the US, beyond a few refurbishing companies.
Manufacturers like Purism, who produce a small number (by OEM standards) of phones and laptops, are aimed at the ultra-secure end of the market. “For all our Made in USA Electronics products, there are no tariffs and no pricing changes as a result of tariffs,” CEO Todd Weaver told The Register.
“For other companies, or in general, any imported finished goods tariffs would directly be passed onto consumers, and in most cases when the ending sale price is a percentage above COGS [cost of goods sold] then the ending sale price increase is greater than the actual tariff applied.”
The argument of the pro-tariff set is that companies like Apple, which use mega-factories in Asia and elsewhere to produce iDevices, will be forced to return these jobs to the US and set up factories here.
Steve Jobs was unequivocal in 2011 on this point when President Obama asked him about returning manufacturing to the US. “Those jobs aren’t coming back,” Jobs reportedly told him, and Tim Cook would probably agree with him. Paying an American worker as opposed to a Chinese one would jack up the price of handsets to unacceptable levels – both for the company and consumers.
There’s also the timing issue. Building factories is a lengthy process, as chip companies are finding out as they take advantage of the CHIPS Act. It would be years before tech firms could build the kind of manufacturing they need in the US and they’d be highly unlikely to try. Instead they’d simply pass the costs on to consumers, and other industries have already said they’ll do the same.
“If we get tariffs, we will pass those tariff costs back to the consumer and we’ll pass them through,” said AutoZone CEO Phil Daniele in a recent earnings call.
“As they turn through, we’ll generally raise prices ahead of – we know what the tariffs will be. We generally raise prices ahead of that. You get some gross margin improvement as the cost of goods turns in and then it flattens out. So, that’s historically what we’ve done.”
According to the non-profit Tax Foundation, the plans as stated would increase the tax burden on Americans by $524 billion per year, shrink GDP by 0.8 percent annually, and cost 684,000 full-time equivalent jobs. And that estimate doesn’t take into account the effect of other countries raising their tariffs in response.
But we already have tariffs!
Almost all countries have tariffs and President Trump wasn’t the first to introduce them to America.
During his first presidency Trump instituted a limited number of extra tariffs, chiefly against China. Upon taking office, President Joe Biden kept them in place and even extended them. But what’s different about these new proposals is that they are rising across the board by up to 20 percent, or so it has been said on the campaign trail.
“Donald Trump is talking about putting a tariff on everything, whereas before there was a fair bit of strategy involved,” Ernie Tedeschi, director of economics at the Yale Budget Lab and formerly the chief economist at the White House Council of Economic Advisers, told The Register.
“Now we’re talking about everything. China will probably come out ahead on this, but it’s really hard to anticipate. And at the end of the day, even if China comes out relatively better. I think both China and the United States hurt in absolute terms, and it’s just a bad equilibrium.”
He explained that, contrary to what some have asserted, the imposition of tariffs is not necessarily inflationary in the classical meaning of the word. This is because it would be a one-off price hit and then normal conditions would resume.
However, he and others at Budget Lab have gamed out such a move, looking at best and worst case examples, and a blanket tariff would reduce disposable income by between one and five percent. People were already sick of the Covid inflationary period and losing more purchasing power would not be popular.
Lovely partially disagrees. While the one-time hit is correct, she added that there are secondary effects that need to be factored in that could make inflation much worse.
“The prices of all domestic goods will rise because they won’t have foreign competition, at least some service prices will rise too,” she said. “So you have the secondary price effect on domestic prices, which we’ve seen before with the open aluminum tariffs, with tariffs on washing machines, with tariffs on some of the things that were coming from China.”
The political angle
Tedeschi also pointed out that traditionally the US has been near the bottom end of tariff use, according to the World Bank data, in the same sort of range as most European countries. If enacted, the Trump tariffs would bump the nation up to be on par with countries like The Gambia.
And there’s another danger, he posited. Countries with populist leaders perform worse than stable democracies when tariffs come into play.
“There’s one particular paper that finds that the populist regimes, they’re similar to democracies in terms of economic growth initially, but then they start lagging in terms of economic growth,” he explained.
“When a populist regime comes to power they impose tariffs, and any exceptions to the tariffs are not necessarily given to productive companies. They’re given to loyal companies, companies that donate to the party’s political loyalists.”
Nevertheless, Trump’s supporters seem fully sold on the tariffs ideal. Part of this is the constant rhetoric that other countries will pay for it. In fact, the extra revenue for Trump’s promised tax cuts will be paid for by importers, who will simply pass the costs on to anyone who buys their products.
“Most of the tax cuts are going to go to people like tech biz founders or the rich shareholders. They’re trading a couple of tax breaks for what I see is quite a devastating tariff on all the goods that we’re importing,” Lovely said. “It’s middle and lower income people who are going to be, frankly, screwed by this.” ®
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