July 03, 2018
Some realism about tariffs
We hear it every day from economists that tariffs don't work, and that Donald Trump is somewhat learning-impaired in his trade policies. There is no doubt that - from a global perspective - a trade war would bring large welfare losses, but Trump is pursuing a much narrower goal, one that looks like succeeding.
When the EU imposed punitive tariffs on Harley-Davidson, the company decided to move part of its production outside the US. That was viewed as victory for the EU - which it was in one sense. But it also demonstrates that Trump's logic is working. The country that benefits the most from a trade war is the one with the largest excess supply of consumption over production - the US in this case.
The FT has a very good insight story into how the car industry will react to tariffs - and found that the response will be exactly the same as that of Harley Davidson. VW, a company with 122 factories across the world, said it will move production to the US if faced with tariffs. The paper quoted a senior executive of the company as saying, essentially, that this is a no-brainer.
So if your narrow goal is to produce as many cars in your country as you consume, then the trade tariffs are working. This is clearly not a good policy goal, but it is Trump's goal. Around half the cars bought in the US are produced outside - so there is a huge potential to shift production back home. Here is the assessment of a car analyst at Evercore ISI, as reported in the FT:
"The sad truth is that if you impose tariffs, production will move around. If nationalist trends continue, the inevitable outcome will be more production where you sell the car because that’s the only way to avoid larger tariffs."
Trump is dangerous, especially for countries like Germany and Japan. But Trump is not stupid.