Do any of those steering the administration’s tariff “policy” — too kind a word for the current shambles — have any idea how modern manufacturing businesses actually operate? Despite the dismal consequences of the Trump 45 tariffs, which destroyed more manufacturing jobs than they created, they seem not to.
In a briefing paper published last year, economist Fariha Kamal explained that “half of all U.S. imports are industrial supplies and capital goods . . . used as intermediate inputs by manufacturers.” Put another way, American manufacturers use a lot of foreign components or equipment. That’s so they can produce competitively priced goods for buyers at home and, incidentally, abroad. Manufacturers which import tend to be significant exporters too, but that doesn’t appear to impress the tariff Taliban.
Slap a tariff — or let’s call it what it is, a tax — on American manufacturers’ inputs, and their costs will rise. They may try to pass the increase on to their customers if they can, but they may also try to secure supply lines in the U.S. in order to avoid the tariffs. That’s what the tariff-setters want, they say (at least when they are not boasting about how much money they will make from their tax, something that implies American companies and consumers will not find satisfactory substitutes), because that will mean that sub-suppliers in the U.S. secure more business, employ more workers and so on.
But will these sub-suppliers be able to deliver their products at a price level that allows American manufacturers to remain competitive at home and, when applicable, abroad? And will they be able to gear up their production quickly enough to satisfy the increased demand from U.S. manufacturers? Do they even exist? If not, what are manufacturers supposed to do?
As Bob Tita and Ryan Felton demonstrated in an article in the Wall Street Journal at the end of last month, these questions are not hypothetical. They were writing before “liberation day” and were focused on the impact of the tariffs imposed on steel and aluminum imports. These, wrote Tita and Felton, “have scrambled the supply chains of companies that make everything from car parts to appliances and football helmets to lawn mowers” and “unlike a similar Trump levy in 2018, the latest ones cover a wider range of imports, including the screws, nails and bolts that serve as the connective tissue in manufacturing.”
The term “connective tissue” works well to describe the complex set of connections that hold a supply chain together. They cannot be reworked without considerable pain. That reworking will, to add another metaphor, also tear through the spider’s web of connections that underpins any business and its relationship with its market with results that will be made even more destructive by their unpredictability: Think of the unexpected consequences of the Covid lockdowns.
Tita and Felton write that higher tariffs had “set off a hunt to find domestic supplies of some of manufacturing’s smallest components,” but:
Manufacturing executives said the U.S. doesn’t have the plants to churn out the amount of steel wire or screws and other fasteners needed to displace imports.
Too bad, it seems.
Like most central planners, the tariff Taliban are not interested in acknowledging realities that don’t fit in with their demands.
This won’t end well.