The Unintended Consequences of Incomplete Thinking

The Wall Street Journal Journal offers an interesting perspective on how tariffs can kill local employment.

The argument is that Harley-Davidson is just the start in its announcement of moving production from the US to other countries. Manufacturers find ways to work around tariffs in order to be price-competitive with rivals based in other countries. They have to do that if they want sales. There’s no mandate that manufacturing has to be in a specific location, but there’s also no requirement that manufacturer’s tolerate a 25% increase in costs imposed by government.

For Harley, moving production to Asia dropped the price at which they could sell bikes by $2,000. That’s substantial.

The key question is where the sales are. For many large US conglomerates, the bulk of their sales isn’t in the US. That means that tariffs will drive them to move manufacturing to where the tariffs won’t matter — in this case outside the US. Most of the companies not moving now have already done so. A few companies will move to the US, but US consumer markets aren’t that vibrant, as Apple discovered with the iPhone X.

The other fact long known to microeconomists is that tariffs increase domestic prices. With less competition, domestic manufacturers can raise prices, and will do so. Tariffs protect inefficient industries and harm consumers and workers.

US industries that can’t move manufacturing overseas — agriculture, for example — will get hurt badly. We’ll see an uptick on farm bankruptcies, and there have been numerous articles about farmer suicides. That’s probably going to get worse.

So Trump invoked tariffs to protect US jobs, and it won’t happen. Just like he promised jobs to coal miners. He just doesn’t think before he tweets, and the Country will pay for the result.

The big question for workers and manufacturers is whether there is a way to unwind the tariffs and undo the damage. If not, and Trump will be reluctant to change his mind, there will be more jobs moving offshore.

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