November 27, 2024 - 2:30pm
Donald Trump has returned to form as the self-described “tariff man” by threatening Mexico, Canada and China with tariffs of up to 25% on “day one” of his presidency in January. Mexican President Claudia Sheinbaum has responded by saying that Trump’s complaints about drugs flowing across the border were an “American problem”, and that her country would impose tariffs of its own if the incoming US administration followed through.
The dust-up reveals the divided priorities which exist within the prospective Trump administration. The President-elect sees tariffs as a means both to protect American industry and to threaten countries pursuing policies that he perceives as damaging to the US. When Trump talks about “America First”, he really means it: the policies he prefers are aimed at shoring up American industry and closing the borders. In economic terms, this means the “reshoring” of firms which have left the United States.
Trump’s priorities, however, are likely to conflict with the goals of the policymakers who carried his protectionist policies into the Biden administration. These people tend to be foreign policy hawks — such as current National Security Advisor Jake Sullivan — who are concerned about the rise of China and want to stifle Beijing’s growth through a combination of tariffs and sanctions, especially against semiconductors.
While both policies may appear similar, in that they each make use of protectionist measures, it will not be long until they come into conflict with one another. Take the example of “friendshoring”, the idea that manufacturing currently undertaken in China — which would be too expensive in America — should be undertaken in “friendly” countries instead. Mexico, with its relatively low labour costs, has been key to this friendshoring concept.
But if Trump wants to impose tariffs on Mexico this obviously conflicts with the aims of those who want to pursue friendshoring, because the goods which are supposed to replace Chinese products will also be subject to tariffs. The reason for this is clear: despite both policies being broadly protectionist, they have different aims. Friendshoring advocates simply want to stifle China’s economy but do not really care about American jobs, while Trump himself is far less concerned with the Chinese economy and more focused on trying to return jobs to the US.
The deck is stacked against Trump in this debate. American business has never been enthusiastic about a trade war with China because it would lose access to cheap, highly-trained labour. If these companies can tap labour from countries such as Mexico or Vietnam, they can live with this. Because friendshoring and reshoring are broadly nestled under the category of protectionist policy, expect the American corporate sector to push hard for the former at the expense of the latter.
So far, the evidence shows that friendshoring does not actually work. If tariffs are imposed on China but not on Mexico, the incentive is for Chinese companies to simply partner with an intermediary company in Mexico. The Chinese company can construct all the major components of a product, ship it to Mexico for final assembly, collect the “Made in Mexico” stamp and pass into the United States tariff-free. Recent studies show that this is exactly what is happening.
Trying to prevent this through secondary tariffs on, say, Mexico is a fruitless exercise — because the supply chain will just extend further. So, for example, China will send the parts to Colombia, which will then ship them to Mexico so that they are registered as Colombian rather than Chinese imports. Governments in every country in the chain are strongly incentivised to look the other way. If the Trump administration spends its time playing “supply chain whack-a-mole”, it will truly be a wasted four years.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeBoring… We all know Trump is wrong
These people tend to be foreign policy hawks — such as current National Security Advisor Jake Sullivan — who are concerned about the rise of China and want to stifle Beijing’s growth through a combination of tariffs and sanctions, especially against semiconductors.
So, are tariffs bad in principle or only when Trump mentions them?
It’s a Pilkington article, therefore anything that may damage non western nations such as China or Russia are abhorrent
Article explains the difference between people who want tariffs to encourage reshoring , & more selective tariffs to encourage ‘friend shoring’
This author is making the same mistake most globalist apologists also make. He considers the critical factor to be where the money comes from and who owns what. He’s probably lived his whole life in that world with that mindset, a world of profits, balance sheets, costs of labor, etc. What he and a lot of others don’t live in that world, and these days many are hostile to it. Americans are well past caring whose corporate accounts record what profits in trade with China or whoever else. All they know is they haven’t seen any of it for a long time and they’re tired of this situation. For better or worse, this is what’s coming. Even if Trump fails, it won’t change the basic political or economic situation on the ground. Americans hate the corporations, hate big business, hate the executives, and hate the capital class. It runs deep. They don’t care about keeping American elites richer than their Chinese counterparts. As far as they’re concerned, the capital class has already betrayed the country and the people.
Along those same lines, people don’t care about ownership. A factory built in a friendly country like Mexico or Japan isn’t as good as a factory built in America, but it’s better than the same factory built in China. Who owns it is irrelevant. Possession is 9/10 of the law. The reality is that much of the economic benefit of economic activity, especially industrial production, is reaped by the people wherever the physical infrastructure is because that’s where the jobs are and that’s where all the satellite industries that provide services and other things for that factory are. If you want to start a restaurant, it helps to have customers that have money and factory employees have money. If you want to provide security, or office supplies, or transportation, or whatever other service, you need customers to serve, a center of economic activity, like a factory. This is what tariffs are about. It’s not about growing the economy. It’s not about ownership. It’s about the bottom line of where the factory is and who benefits from that. Whether the factory is run by corporate overlords from China or America or outer space doesn’t matter to voters. Americans don’t give a flip. The capital class doesn’t seem to care about American workers, so American workers are returning the favor. They’d probably rather have Chinese owned factories in Cleveland than American factories in Guangzhou by many orders of magnitude. What goes around comes around. American companies pursued profits without regards to where the labor came from or who got the jobs, so American voters are pursuing jobs and benefits without regard to where the capital comes from or who reaps the profits. The chickens of globalism are coming home to roost. This is not a good time to be an American elite engaged in global trade.
There’s a fair chance that the clash between populist sentiments and the elite push back against them will indeed spark an economic crisis, perhaps even another Great Depression, but there was a chance of that happening anyway even if nothing changed. Even if it does happen, maybe it needs to. The problems are so systemic it might take a disruption of that magnitude to change incentives enough to start to crawl out of this hole we’ve dug for ourselves. If/when it happens, it won’t matter who is president. Trump or whoever else might get some of the blame, but the people will pin the lion’s share of the blame on the billionaires who drive the globalist enterprise. They won’t suddenly forget the people they despise and start throwing stones at their chosen champion. No indeed, they won’t forget. They won’t forget the decades of closing factories. They won’t forget the private jets and private yachts and giant mansions of the billionaires who have built their fortunes upon the globalist scheme. The people will be even angrier, and they’ll go even further to smash the elites. Billionaires will get no sympathy, and no quarter, from the American working class. The sharks are circling. The defeated globalists would be wise not to rock the boat.
Why Trump is beating around the bush of China though? Do you think he is afraid of impeachment,?
I think he’s probably afraid of triggering another round of inflation. Further, he’s a deal maker who uses yhe other side’s uncertainty to his advantage. He wants them to be afraid of the threat of immediate decoupling and an escalating tariff war that decimates both sides in the short term because Trump has for all intents and purposes already sold the narrative that China and global trade have not benefited Americans enough to offset the losses. He can press the economic nuclear button and blame the other side. Xi can attempt to do the same but China’s economy is specifically and strategically designed to manufacture goods at low cost to sell to a global market, of which the Us represents a significant share. Put simply if the Chinese cannot sell to America, they cannot profit from their strategy of subsidized manufacturing and artificially low prices. Their economic model becomes unprofitable. True, they can still sell to America through intermediaries and third parties, but those third parties will then capture some portion of the overall profits for their nations while holding a certain power over the Chinese regime by controlling access to the American market. Over the long term, decoupling would hurt the USA, but it would completely break China, whose totalitarian government would probably turn all that suddenly useless productive capacity to weapons manufacture, setting the Second Cold War up to resemble the first. I suspect Trump, and most of the people who voted for him can live with that even if it becomes hard to get manufactured goods for some period of time, because the cost of food won’t be affected and the cost of energy would almost certainly drop. These are the only types of inflation poor Americans really care about anyway.
So much this. Americans are also well aware who sold out their manufacturing base in the first place and who profited from it.
Sounds like Mexico has got what’s coming as much as China. And hopefully no producing of little remixes of NAFTA this time, the new administration.
Trump wanting to re-shore jobs lost to China is admirable and what many who voted for him believe he’ll do. Nothing mentioned though about a spike in inflation/cost of living for some time whilst this happens. They are expecting some pretty immediate positive market signals not rising prices.
Thus the question is how much pain is Trump prepared to take in trying to meet this objective? And how much pain has he warned his supporters they’ll have to take re: inflation/cost of living before the promised re-shoring really happens. I’m not recollecting he’s been that straight with them or have we missed something?
Then there are all those who helped fund his election, and interestingly endeavour to keep that secret. (The funding for the transition team is usually fully disclosed but not under Trump). So some ‘big money’ in the shadows and won’t be expecting to take a hit after backing him.
China is going to test these contradictions for sure.
The real issue are go after:
China – as shown by this article in “supply chain whack-a-mole”
OR
The focus should be on making corporations accountable to the country that provides them the incentives and security to do business. Instead of promoting superficial ideas of governance like diversity or social responsibility as mere branding, corporations should contribute to national security payments to help build infrastructure in their home country. I think Americans would love to hear the words National Security!
This approach wouldn’t kill their profits—they can continue manufacturing cheaply abroad, but they must also invest in the U.S. If they don’t, there should be consequences: no bailouts, no security guarantees, and higher taxes anyway!
This may be political juggernaut for any politician but either he gets it done or puts the seed for a better person to come in the future and force the corporations hands!
It’s simple.
You just change the definition of “built in”, for instance you just need coc for all of the major components. Course then you get into third party inspections and such.
Your 2 dollar widget comes in a little higher.
The author of this article gets lost in his own weeds. Somewhere in here is a point, but I cannot find it, in all the verbiage. I assume he disagrees with tariffs as an economic tool for negotiation (try selling an American product in China, btw) but the reasons aren’t given. Instead, point follows point, without anything to connect them together in neat fashion. No stars.
Toss the board of US company that plays musical trade chairs in prison
Author still thonks it’s 2010.
Shoot the board
Chinese companies partnering with intermediaries won’t bypass Trump’s tariffs unless those intermediaries are willing to face the same penalties as China. Accurately tracing supply chain origins isn’t as challenging as the author assumes. Moreover, the additional costs from shipping, assembly, transshipment, and intermediary-specific risks—whether political, labor-related, or economic—will significantly drive up the final product’s price.
Another pretentious China nonsensical shill post. Boring and inane.
Tariffs seem to be all about penalizing other places, or trying to create level playing fields. We never seem to hear discussions about how to make the U.S. a more attractive place to set up shop in the first place. Eliminating the corporate income tax would be a good start. It doesn’t raise much revenue anyway and is mostly paid by customers. This should incentivize companies to move their headquarters and their factories to the U.S., much like Ireland was able to do with a low corporate income tax. Companies would need to employ a certain percentage of their employee base in the U.S. in order to qualify for zero income tax status.