Trump's tariffs bring cheer to Maga base, but hurt US jobs and industry

The tariff wars that Trump has unleashed overlook his country's biggest competitive advantage - and may even irreparably harm it in the future

Economists may think Donald Trump urgently requires a crash course in Economics 101 since the extraordinary tariffs he imposed on most of the world on April 2, “Liberation Day” are incompatible with almost any economic logic —including the 46th President’s expectation of higher revenues to finance tax cuts for his billionaire cronies. But putting aside these motives and inchoate comments about the “unfairness” of trade deficits, everything begins to make sense when the tariffs are viewed from a political angle. As businesses nervously calculate the costs of Liberation Day, Mr Trump’s core Maga supporters are cheering.

 

Mostly blue-collar and often unemployed, they think import tariffs will bring manufacturing back to the US. The president of the United Auto Workers (UAW), for instance, said the 25 per cent tariffs on imported vehicles “rights a historic wrong” — the North American Free Trade Agreement of 1993-94 that saw manufacturing operations shift to Mexico and Canada.

 

The immediate response of auto-makers suggests otherwise. Though General Motors said it would move some production back to Indiana, others such as Jaguar Land Rover and Audi have stopped shipments of their vehicles to the US — so much for tariff-driven revenues. Stellantis has, in fact, idled factories in Canada and Mexico that make the Chrysler and Jeep brands, and laid off 900 workers in Michigan who supplied components to those units — rather defeating the purpose of the tariff. 

 

The UAW may see hope in the fact that General Motors said it would shift some production to its plant in Indiana to make light trucks, however. This product is, in fact, a good example of the problems with tariff protections on manufacturing. Pick-up or light trucks have been behind a 25 per cent tariff wall since the 1960s, originally as retaliation against a German tax on imported chicken.

 

The tariff on light trucks was, till Liberation Day, significantly higher than on imported cars. The upshot was that auto-makers in the US concentrated on making light trucks, for which there is no foreign competition, rather than competitive smaller, cheaper sedans. The pick-up truck business has undoubtedly been profitable for auto-makers in the US; the problem is there’s almost no market for these guzzlers elsewhere. The world’s largest light-truck maker, with the largest global market share, is China, where manufacturing costs are almost 10 per cent lower than in the US.

 

The light truck example suggests that the US will struggle to match the cost competitiveness of multinationals sourcing their automotive products from elsewhere — notably China, on which the US has slapped a 104 per cent retaliatory tariff. Those that do opt to “reshore” manufacturing to the US are unlikely to appreciably change the employment landscape, as Mr Trump may hope. As they are doing around the world, manufacturers are likely to rely increasingly on AI-driven automation to keep labour costs in check.

 

Access to a trained workforce will also come at a premium, since US manufacturing has shrunk over the past decades,  with only one in 12 American workers employed in the sector, compared with one in five in the 1970s. Of course, there is plenty of technical skill available in Asia, but Mr Trump’s anti-immigrant policies are unlikely to see, say, Chinese workers flooding into the US to bridge the talent gap.

 

The Trump administration is also betting on the tariff walls to encourage Apple to make its iPhones in the US. That, too, is unlikely. Apple sources its iPhone and other products mostly from China, India, and Vietnam. One analyst concludes that an iPhone would cost about $3,000 if it were made in the US, against its current cost of $1,000. Since almost every part in the iPhone is made outside the US, relocating stateside would require Apple to reorient its global supply chain set-up, a disruptive process that could take years. Tim Cook must be ruing the huge donations to the Trump presidential campaign, as are Jeff Bezos and Mark Zuckerberg, whose conglomerates stand to lose significantly as Chinese advertisers, who make up the bulk of their ad revenues, pull back on spending. 

 

Trade barriers have not been particularly helpful to the US in the past. Limits on sugar imports to encourage domestic production, a legacy of the Cuban Revolution, virtually wiped out the candy industry in the US as confectioners sought cheap sources of sugar elsewhere. Though US relations with Cuba have normalised, the moneyed sugar lobby remains a powerful advocate of import controls to this day.

 

If the US needs a lesson in the adverse impact of tariff protection, it only has to turn to India, which Mr Trump has rightly lambasted for its import tolls, though for the wrong reasons. In the sixties and seventies, Indian manufacturers produced everything from steel to cars — and later, consumer durables — under the shelter of import and licensing restrictions. This policy subjected long-suffering Indian consumers to shoddy products, from cars and refrigerators to washing machines and TVs, which were often so scarce that people paid a premium just to jump the queue. Without the discipline of competition, most of those “leading” brands — bar notable exceptions — vanished soon after Indian consumers’ “Liberation Day” of July 24, 1991.

 

The problem is that having flourished under protection from the start, the bulk of Indian manufacturing never learnt to compete meaningfully on global terms, either ceding space to foreign manufacturers or remaining lobby-driven domestic producers. That is partly why the current ruling dispensation’s penchant for raising tariffs as a means of nudging domestic manufacturers to invest has not worked.

 

The US, on the other hand, still dominates global intellectual property. That is how, for instance, a Cupertino, California-based startup made billions from designing products that it gets manufactured competitively elsewhere in the world. The tariff wars that Mr Trump has unleashed overlook his country’s biggest competitive advantage and may even harm it irreparably in the future.