The Truth About Tariffs And ‘Trade Wars’

The Truth About Tariffs And ‘Trade Wars’, by Karl Denninger in the US.

It is a fact that throughout human history humans have attempted to enslave one another. So long as one can compel someone to work in some fashion that does not reflect economic pressures you can profit from this, and some percentage of people will. That person or organization will succeed on a profit basis where others who do not adopt that policy will fail. This inevitably encourages such behavior until only those who engage in it remain in business! …

GM is going to make the Blazer in Mexico because they can employ what amounts to legal slave labor in Mexico that carries an “all-in” cost of under $4/hour. They will not sell any such trucks to the Mexicans building them because on a $4/hour wage nobody can afford to buy a $40,000 product. GM incurs the shipping expense of the finished product back to America because it is lower than the labor differential expense were they to build that same truck for our market here.

Apple sources labor for the iPhone in China because it’s cheaper than sourcing the same labor in the United States. China has a huge number of people who live in abject poverty — they’re peasants. China allows factories to come into those towns and literally destroy the means of survival (rice paddies and similar) that said people were formerly relying on — either by paving them over and erecting a factory or by emitting pollution into the ground and water supply to the point that you can’t grow a crop there anymore that won’t poison you. Those employees are not “at will”; they are factual slaves. …

But what happens if Trump lays tariffs that erase the benefit of employing slavery in other lands? Let’s say for example that Trump was to figure out the difference in labor cost in a Blazer between one built here and one built in Mexico. It’s not hard — $4/hour there, $20/hour here times however many hours of labor are in the truck and all parts not made in America, plus the avoided environmental expense. That’s the tariff.

Now take Apple’s iPhone. How much would the screws and assembly cost here .vs. over there for all parts not made in America, plus the avoided expense in the non-US components made where environmental damage is not prevented? That’s the tariff. …

Those manufacturers no longer have an economic reason to put labor there. They will bring it here instead, by and large. …

No, your iPhone will not cost an extra $200 nor will your GM truck. If either company could charge another $200 or $6,000 for their products and still sell them here in the United States they would do it right now. What prevents them from doing it is that they’ve determined that demand is insufficient to support that price. That does not change if there is a tariff imposed.

So what will happen is that Apple’s margin on said iPhone will go from 40% to 25% and their stock price will reflect that. Likewise GM’s margin on that truck … will come in and so will their stock price. …

Now are there places we can have “free trade” with? Sure — we could, for example, have zero tariffs on cars between the US and EU. Why? Because the slave labor and environmental issues are mostly-absent in both nations when it comes to building cars up and down the supply chain. But even with zero tariffs VW would be insane to build their cars in Germany for export to the US when they can build them here, as they’re doing today. Ditto for US automakers selling in Europe; why would you build a car here in the United States and then incur anywhere from $750 to over $2,000 in freight costs to move it across the ocean?