The Truth About Tariffs And 'Trade Wars'
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2018-07-13 11:25 by Karl Denninger
in Editorial , 505 references Ignore this thread
The Truth About Tariffs And 'Trade Wars'
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Let me preface this by saying that the way Trump is going about this trade issue is wrong.  He's getting a better result than doing nothing, but the fact of the matter is that he's approaching it incorrectly, and it's by mere accident that the outcomes are working out.

Specifically, on outcomes, import prices are down and export prices are up.  How's that bad, exactly?

As I pointed out in Leverage in my section in recommending Wage and Environmental parity tariffs the problem with "free trade" policies is that they're anything but because you cannot control the legal environment in other nations.  As a sovereign said nation is free to set whatever internal legal environment it desires.  Short of an embargo or outright war you cannot compel another nation to adopt your view of human rights, workers rights or property rights, to name three obvious things.

Now couple this with two additional facts: Technology has shortened the effective distance and delay between a point of control and a point of action which lowers the imputed cost that comes with distance, and that corporations always exist for one purpose above all others: To make a profit.

Corporations operate in the legal framework permitted by the nations in which they have facilities and people.  If you wish to constrain a corporation's underlying purpose, which is to maximize profit, you must constrain the legal environment in which they operate.

There is no other way to do it.

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!

As such the only constraint on such behavior is laws that are actually enforced so that the cost of such behavior is higher than the benefit.

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.

Apple (and others) source the screws for the frame of their device from slave labor factories in places like Malaysia.  Malaysia, and other Asian nations, have a thriving illegal immigration problem which they actively exploit.  Much like the "coyotes" who run Guatemalans to the United States as indentured servants, since no such person has the $6,000 average "fee" for such a service in advance, these nations allow the same practice.   We in fact do it here too; we "allow" employers to hire someone on an H1b visa but they are captives to that employer since their visa is bound to the entity that employs them.

Multiple large, "luxury" brands in America source tanned leather from similar third-world crapholes for the same reason.  Tanning leather requires the use of toxic chemicals and properly disposing of them is expensive.  It's (much) cheaper to dump them in the water (but that's illegal in the US) and, if you can obtain effective slave labor while destroying the environment there as well that tends to destroy the option of local people to subsistence farm at the same time then so much the better.  Ditto for all the clothes that come from places like Vietnam and Bangladesh.

Is this a "free market"?  Of course not.  But it does produce cheap screws -- both for Apple and up the ass of the people making them.

Now contemplate this: The average IQ in this nation is approximately 100.  Fully one half of the people are on the left side of the bell curve.  Those who are "business successes" as entrepreneurs, CEOs and similar are statistically all on the right side, and most of them are 2 standard deviations or better to the right -- that is, in the top 2% of all persons.

That's six million people, more or less, in the US.

What do you do with the 150 million-odd people who are on the left side of the curve?

Business and politicians alike ignore them in recent years, but had better not.  They're fully half the population and were there to be a civil war you might want to compute the odds of six million people surviving when 150 million decide to eat them.

If you're in that top 2% you're what's for dinner, irrespective of whatever sort of technological prowess or equipment you may deploy.  Oh sure, you'd slaughter a lot of those 150 million in the process, but you still die and so does your entire family.

Every.

Single.

Time.

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.

Go down the list one at a time of everything we import and look at what costs are evaded by firms soliciting labor through other lands where the legal environment does not protect the right of free movement, the environment and similar.  That, by the way, is essentially everything this nation imports.  Set the tariff as equal to that evaded cost.

Now lay the same via taxes on any firm that employs H1b -- or the so-called "Seasonal worker" visas (H2a and H2b) .  Take the full imputed cost including salary and benefits of said person and, if lower than a US individual of the same skill set employed in the same job that's the tax due.

What happens if you do this?

Those manufacturers no longer have an economic reason to put labor there.  They will bring it here instead, by and large.  Further, watch how fast all those H2 jobs who people claim "can't be filled by Americans" suddenly can find all the employees they need!

The result is that all those people on the left side of the curve will have jobs that are sufficient to support themselves and their families.

But what if the manufacturers don't bring the labor back?  Then Treasury has hundreds of billions of dollars in surplus funds to cover the welfare costs of everyone on the left side of the curve.

Either way the outcome is the same -- we have a stable, thriving society.

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 (remember, they make more on trucks than any other vehicle) will come in and so will their stock price.

Neither company will admit this because if they do there is a very real risk that those 150 million on the left side of the curve will decide to eat the executives of said firms and the politicians that screwed them out of a job on purpose so the top 2% of the nation can make money through a rapidly advancing stock price!  See above for the survival odds of that ~6 million should the other 150 million take that decision.

That is why they lie repeatedly on this subject and in fact will never admit the truth.

Now the usual argument is that these other nations will "retaliate."  Let 'em.  If you think about it what's there to retaliate upon?  GM is a global company.  So is Apple.  Apple will build iPhones for the US inside the US.  They'll build the ones to sell in China in China.  GM will build trucks for Mexico in Mexico (if anyone can pay for them there.)  And so on.

That outcome isn't bad, it's good!  It's always more efficient to build something closer to the point of consumption.  Shipping is not free, never mind all the screaming about carbon emissions which are inevitably tied to moving crap around the world!

Trump is getting a good result even though he isn't doing it the right way.  Both he and Navarro are trying to look at this as a function of "trade balance" in dollars, which is the wrong approach.  It happens to be working (although the stock market has yet to recognize the loss of imputed valuation due to ending slave labor) essentially by accident.

We ought to turn it into "on purpose."

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?  Do you really think these firms intentionally undertake $2,000 in loss to ship an SUV across the Atlantic?  If so you're nuts.

Wake up America.

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Aztrader
Posts: 8017
Incept: 2007-09-10

Scottsdale, AZ
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As an importer, I deal with tariffs with every order, unless it's the Chinese and they know how to bypass customs and or the Tariff system. The Europeans are completely scared of their governments and make sure that every shipment is fully valued and shipped with every part required by law. This is expensive because my holsters carry a 20% tariff out of Italy and I have to add it into the price here. I have tried to talk to American manufactures, but they want a minimum order of 1000 units and the mold costs which can be substantial. These tariffs allow American manufacturers to control the entire system and small businesses don't have a chance to compete.
The Chinese will ship you 1000 soccer balls and call them marbles and even though you paid them $10,000, they will mark the invoice $800.00 which is the maximum threshold to be under the Tariff's. The biggest scam is the Epacket that the Chinese use to ship smaller items into the US with free shipping from the USPS. This is where a lot of the drugs come in and are never examined by customs due to their size and value and are shipped in the US, postage free by the USPS.

Trump is correct in that the Chinese are the worst abusers of the system, but he is missing the biggest part of it called fraud. I can go to Alibaba or DHgate and order product and it is shipped straight to my doorstep without any customs inspection. If it comes over on a ship, then customs will look at it, but 95% of the time will never question the value of the product.

Think about the opiate issue in this country. All the dealers have to do is place an order to China or SE Asia and they are put into an E-packet envelope and shipped directly to the buyer in the U.S. It couldn't be easier or scarier. These countries need to watched closer for violations because they are masters at it. Anything coming out of SE Asia should be inspected. Too bad it would slow down their sales and******off their American customers, but is necessary.
Click
Posts: 194
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"What do you do with the 150 million-odd people who are on the left side of the curve?"

What should be done is not what's being done.

What's being done is a massive money and credit expansion designed as a socioeconomic expedient rather than a long-term, free-market solution, i.e., run up both public and private debt until a Minsky moment happens and then blame everybody but those who actually caused the problems in the first place, viz., crony capitalists and Marxists.

Collectivism never ends well.

Free markets (including free trade) is actually the best economic model; however, the fact is free market capitalism is impossible to implement in a world full of collectivism. Open borders is also impossible in a world full of ignorant Marxists.

So, what is the next best thing? A Constitutional government. But that's impossible, too. So what options are left? And I'm not talking about pie-in-the-sky **** like Ron Paul is suggesting. And I happen to like Ron Paul.

The best option we have ( and it's pretty ****ing sad) is an Emperor who kicks ass, balls and ****. And his name is not Jeb, Mitt, John, Rand, Ron, Hillary, Chuck or Pocahontas....
Killben
Posts: 306
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"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."

Exactly!! Imagine companies letting go of profits. Not gonna happen!

But all these talking heads and politicians will holler to make us believe that the world will come to an end and it is all because of Trump. There seems to be a method to Trump's madness. At least he is kicking everyone and making them wake up. It is about time. I hope he has reserved his bets kick for the central bankers. if at all anyone deserves it is them!

Lastly why don't you mail this article to Trump in case he misses it.
Redjack
Posts: 74
Incept: 2018-01-29

Iowa
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But those same executives have a bonus based on what the margin and stock price is. They will not allow that to be touched, and will use all avenues to insure that those trucks keep being made with slave labor.

My brother in law is one of them. Lives in Seattle. I asked him "What do you think is going to happen when the welfare checks start to bounce?" His answer is he will pack up his family and head to China.

Just left it at that.
Aquapura
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Quote:
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.


This is a very hard concept for those on the left side of the IQ curve to understand - probably many on the right side to. While they'll bitch and moan about big business they cannot understand the supply/demand curve and that raising the price to offset the tariff would destroy demand therefore the business.

Tariffs are, as Karl so eloquently outlined, the best way to reduce wage imbalance between the C-suite and the avg worker. You'd think the lefty pols would be all over this if they weren't owned by big business.
Benthere
Posts: 18
Incept: 2018-06-16

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This article got me thinking especially the truck issue. KD used labor of $20 but I think reality is more like 50 with medical unemployment taxes, PR taxes, disability, work comp, etc maybe $60. I dug a little & estimates of hours in a truck is 80-100 So taking KD's proposal lets peg the labor differential at 50, so tariff would be say $4000 approx., Lets even go 5000 what GM is saving on labor. They have to ship parts maybe but shipping ea truck back is at least 1500 depending where its going. So 3500 difference. No way their isn't quality issues , supply chain issues and my experience in Mexico its 3 workers per 1 in the US due to training, skill etc. So the differential is further eroded, hardly seems to be worth the trouble unless avoiding unions and environmental
Wifi
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Seagrove Beach
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Totally off topic,



Karl, in our local newspaper http://www.nwfdailynews.com/news/2018071....

Just thought I would share

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Hurricane Evacuation Plan
1.Grab Beer
2.Run Like Hell
Lenguado
Posts: 2329
Incept: 2010-01-12
A True American Patriot!
Orlando, FL
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Quote:
Trump is getting a good result even though he isn't doing it the right way. Both he and Navarro are trying to look at this as a function of "trade balance" in dollars, which is the wrong approach. It happens to be working (although the stock market has yet to recognize the loss of imputed valuation due to ending slave labor) essentially by accident.

We ought to turn it into "on purpose."

Don't take this as my necessarily projecting brilliant intelligence onto Trump that he may or may not have, but Trump is not a stupid person. Being in business all those years - and operating overseas as well (both in real estate and having his products manufactured there) - he may very well fully understand all the points you lay out. He may also fully understand the implications and the pitfalls of imposing tariffs and getting into a trade war. Maybe he does - or maybe he doesn't. But one thing that we do pretty much know for sure is that he DOES know his audience.

If you think about most Americans (heck, most people all over the world) - both those on the left and right side of that curve - even those who CAN understand what you have laid out in your 'spot on' and easily read breakdown on tariffs and trade wars above, 98% of them will get that far off glazed over in the eyes look when you start going into the kinds of detail and logic you lay out. Most people I know who do know something is wrong but can't explain what it is, they get that same look and change the subject when I try to explain it to them. The overwhelming majority of folks either CANNOT get it - or are blissfully happy being willfully ignorant, they DO NOT WANT to get it.

We are a 15 second sound byte society now. If Trump tried to explain that he was doing it, as you say, "on purpose" - laying out the argument for wage and environmental parity tariffs, he would lose 50% of his audience after the first 15 seconds. He would then lose another 48% of his audience after the first logical argument because it won't comport with their worldview, or they just want to remain blissfully ignorant - even if they support him doing so.

So, "knowing his audience" - Trump dumbs his argument down to a nice clean and quick "trade imbalance" sound-byte argument. Red Meat for the crowds at his rallies, and easily put into a 10 second media byte. Doing that, he knows that it will likely make it into the news cycle - even in the "Fake News" main slime media - and it gets wide dissemination. Those who support him can re-Twat it out, and those who don't support him can do the same as they vilify him . . .

Is he doing this on purpose? Don't know. Could he be doing it on purpose? I suppose. Or like you say, it could just be a "dumb luck coincidence" that is working out - so far.
smiley

And like you, I don't care whether it is "on purpose" or just happenstance - as long as it is working.

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I just realized... they aren't saying, "Keynesian Economics"
they're saying "Kenyansian Economics". Grass Huts for everyone!
smiley
Welcome to historys first Double Dip Depression
Jduwaldt
Posts: 669
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Orange County, CA
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Redhawk wrote..
My brother in law is one of them. Lives in Seattle. I asked him "What do you think is going to happen when the welfare checks start to bounce?" His answer is he will pack up his family and head to China.

Whether you want revenge against your BIL or not, it sounds like he's going to do all the work for you. Unless he has staunch friends in the PRC or when he says "China" he means "Hong Kong", he's in deep trouble once the problems wash up on the PRC's shores. (And what's he going to do if the problem ORIGINATES in the PRC, and washes up here?)
Ah well.

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It's not an issue of "cooperation" vs "go it alone": it's a question of involuntary vs voluntary relationships.
Lobo
Posts: 482
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Tickerguy wrote..
Corporations operate in the legal framework permitted by the nations in which they have facilities and people. If you wish to constrain a corporation's underlying purpose, which is to maximize profit, you must constrain the legal environment in which they operate.

Exactly. Once one corporation goes overseas, the current legal environment in essence forces everyone in the same business to move overseas or go bankrupt.

Would corporate taxes for overseas operations versus US corporate taxes need a bit of adjustment as well? Or simply add that into the tariff?

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Village Idiot
Tickerguy
Posts: 153516
Incept: 2007-06-26
A True American Patriot!
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It's all part of the tariff.

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Winding it down.
Imustbenutz
Posts: 331
Incept: 2010-11-04

Absurdistan, USSA
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Great article.

This is the missing graphic I appropriated Monday, October 26, 2015, 11:58:05 AM (according to the metadata)
Inline

Redjack
Posts: 74
Incept: 2018-01-29

Iowa
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Jduwaldt

He likes the "order" the "Safety", and the fact that they all treat him well as they loot his companies IP.

I worked with many current and "former" PRC nationals. They are pretty clear that while they view all non Han as little better than walking pigs. They may like us as the best walking pig among the group, but pigs get slaughtered at the end of the day.

One gentleman who told me that was quite shocked when I gave him a little poem from Kypling and told him that my people were pretty well behaved, till we aren't.
Wa9jml
Posts: 171
Incept: 2017-04-29

DeKalb, Illinois
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One of my now retired friends in the Geology Department had a Han Chinese grad student show him a picture of that student with a drawn saber on a rampant horse. The student claimed that all of the Americans he had met were spineless and weak. My friend, who grew up in the South informed him that what he had seen were academics, and that there were plenty of Southern Good Old Boys, who would be very happy to kill him with a smile on their face. The student didn't much like that comment.
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