Main Street

The Donald, Trade Wars, and Main Street

By David Stockman  |  July 10, 2018

Every man lives by exchanging.

– Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)


America is sinking under the crushing weight of the State.

The Warfare State and the Welfare State is each a Leviathan of its own, blown up beyond proportion by Keynesian central planners at the Federal Reserve.

Bubble Finance is systematically crushing workers, savers, and productive investment. That’s what’s killing the economy.

The Donald’s trade war does nothing to help Main Street.

It’s Statist.

His threat to levy tariffs of 10% to 25% on 91% of Chinese exports certainly doesn’t. That stuff ends up where real people can reach it, on Wal-Mart shelves and in search results.

He’s also tweeting about European cars:

Based on the Tariffs and Trade Barriers long placed on the U.S. and it (sic) great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20 [percent] Tariff on all of their cars coming into the U.S. Build them here!

Even with the expanded 280-character format, the Donald grossly oversimplifies the situation.

Government can’t walk and chew gum at the same time.

Yet we expect it to not just properly define the grid but to make its outcomes both “free” and “fair” for everybody.

Trade can’t be “managed” in ways familiar to us.

It can’t be broken down by “product line.”

And it can’t be organized according to bilateral relationships, defined purely in terms of country pairs and the stuff that goes from one to the other.

That’s just not practical.

We’re talking about a global grid of flow and reflow of raw materials, intermediate goods, and finished products.

The flow of services adds more layers. And financial flows are the most complex.

Set aside all that.

A new tariff “deal” along the lines the Donald drew in his tweet won’t actually add to U.S. auto output. It won’t create new jobs

Proposing it, however, risks retaliation and conflict.

Consider, too, the fact that U.S. automakers have been building and selling cars in Europe for decades. That’s what GM does with Opel. Ford has Ford of Europe. Chrysler merged with Fiat.

Let’s assume the tariff is zero.

GM is not going to cannibalize its already money-losing Opel subsidiary by attempting to sell Buicks or Chevrolets in Germany.

And there won’t be much demand for Cadillac exports to the backyard of German and Italian luxury engineering.

At the same time, nearly 60% of the 1.26 million passenger cars shipped from the EU to the U.S. in 2017 were from Germany.

We’re talking luxury/up-market cars made by BMW, Mercedes, Audi (Volkswagen), Porsche, etc.

Even a 10% permanent tariff won’t materially reduce sales of these prestige vehicles in the U.S.

Nor would it cause much displacement of production to this side of the pond.

At most, these brands’ affluent customers might see higher sticker prices.

The fact is, the 10% EU tariff on cars was designed to keep Japanese high-volume vehicles out of European markets.

It’s to protect jobs at the VW, Renault, Fiat, Seat, Peugeot, etc., mass-market vehicle plants in Europe – as well as the Ford and Opel plants that were already there, too.

On the margin, ironically, the 10% tariff helped Ford of Europe’s profits because Ford of North America essentially stopped exporting to Europe way back in the 1920s.

By the same token, the 25% U.S. tariffs on light trucks and low gas taxes in the U.S. created powerful incentives for foreign suppliers.

That’s why Toyota, Honda, and Nissan build pick-up trucks in North America. And that’s why Mercedes and BMW build their SUVs in South Carolina and Alabama.

The high-volume market for gas guzzlers is in the U.S. Exports back to Europe comprise only marginal volumes due to prohibitive fuel taxes in the EU.

The Donald is stirring up a hornet’s nest based on the simple-minded math of tariff differentials. But those equations are totally irrelevant to the economics of bilateral trade flows.

Indeed, “managed trade” is actually anti-MAGA.

That’s even if it were logistically feasible and could be accomplished without stoking trade wars.

At the end of the day, tariffs and other barriers to trade hurt “their” economies far more than they hurt “ours.” Those things result in higher costs and reduced efficiency.

Indeed, export subsidies by China, for example, are really a misguided form of foreign aid to U.S. consumers.

Why look a gift horse in the mouth?

Let foreign mercantilist governments penalize their own consumers and industries with tariffs and other barriers to trade.

Why should the U.S. replicate the stupidity?

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR