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The Trump tariff and the dumb market

Imagine five American firms, each of which lays off New York workers.

Firms 1, 2, and 3 close their New York widget factories.

  • Firm 1 builds a new widget factory in Mexico.
  • Firm 2 builds a new widget factory in South Carolina.
  • Firm 3 does not set up a new factory anywhere. Instead, it buys widgets from a separate company which built a widget factory in Mexico and imported them into the U.S. This separate company never had a U.S. factory.
  • Firm 4 closes its New York call center and lays off all its employees. The firm opens a new call center in the Philippines.
  • Firm 5 keeps its New York widget factory open but replaces half its employees with robots.

In all five cases New York workers lose their jobs. Firms 1 and 4 move New York jobs to foreign countries while Firm 2 moves New York jobs to South Carolina.

President-elect Trump’s proposed new 35 percent tariff would apply to Firm 1, and specifically to goods imported into the U.S. from the new Mexican factory that replaced Firm 1’s now closed New York factory.

It appears his policy would not apply to Firms 2-5. Based largely on his recent interview on Fox News Sunday with Chris Wallace, here is my best read of Mr. Trump’s intent.

  • The policy clearly does not apply to Firm 2, which “moves jobs” within the U.S.
  • He said the policy would apply to a company that “wants to move to Mexico or another country.” Firm 3 isn’t moving anything. Firm 3 shuts down a U.S. factory, while a separate firm makes the replacement goods and imports them.
  • Firm 4 is outsourcing services, not goods. (I think) his policy would apply only to manufactured goods.
  • The tariff also doesn’t apply to Firm 5, since while jobs are lost, no jobs are moving.

Over the next few months Team Trump will have to address the following four questions about his proposed tariff.

Question 1: Will it work? Will the threat of an import tariff prevent the case of Firm 1? In the short run, yes. A punitive tariff can be set high enough that it outweighs the cost advantages of cheaper foreign labor and a less burdensome foreign regulatory environment. The tariff would in effect trap […]

By | 2016-12-13T16:48:30+00:00 Tuesday, 13 December 2016|