America’s Trouble With Tariffs

America’s Trouble With Tariffs

A bit more than 240 years ago, America launched history’s greatest experiment in government — self-governance. In three days, we launch America’s greatest experiment in self-governance.

We are turning over the reins of government to what is effectively a Latin American-style “strongman.” I say that not to be critical or judgmental, but to simply define the leadership style Donald Trump has demonstrated in his campaign, his tweetstorms, his press conferences, his pre-presidential attacks on various companies in America and overseas, and his pronouncements about how he will implement the policies he wants to implement.

Where his policies take us — and how he ultimately implements them — will define the next stage of government and our economy. It will almost assuredly begin next week, and it will set the tone for where Wall Street goes next…

Trump’s first 100 days is certain to be a whirlwind of activity that changes significant, sometimes long-standing policies in America.

Obamacare is likely toast.

Immigration will probably change.

Our approach to the “one China” policy of recognizing Taiwan and mainland China as a single body promises to elicit troublesome tension in Beijing.

D.C. is likely to take a stronger pro-Israel stance that disrupts Middle East relations by announcing it’s moving the U.S. embassy in Israel to Jerusalem — a move that would enflame Palestinian sensibilities.

And we’re almost certain to see tariffs and taxes slapped on foreign-made goods destined for America.

It’s that last one — tariffs and taxes — that has me most worried for the economy in the early days of the Trump administration.

New Tariffs on Foreign-Made Goods

Tariffs might seem a viable way to create jobs, as Trump believes, but they are an inefficient job generator because of the knock-on effects they have.

First, the facts, as laid out by Trump and his team:

  • Trump is looking to impose a 10% across-the-board tariff on any foreign product coming into America.
  • He wants to slap tariffs of as much as 45% on Chinese products.
  • He wants 35% tariffs on Mexican-made products coming into America.

This strategy is raw protectionism that, according to Trumponomics, will encourage companies to relocate their production plants to America, thus creating jobs … and encourage Americans to buy American-made products, which are priced more competitively when foreign goods carry the cost burden of tariffs.

Alas, not so much…

The World of Low-Cost Labor

We’re no longer living in a 19th-century world where Trump’s parlor trick might have once worked.

We’re in a modern, flat world (economically speaking) where labor is a largely interchangeable commodity, no different than iron ore or sugar. Business always pursues the low-cost provider of a given commodity as a way to generate greater profits or to undercut competition by providing the same or similar product at a cheaper cost.

That’s actually a benefit to you and me. It (along with easy access to credit) has allowed Americans in the middle class and lower to live aspirational lives filled with 60-inch flat-screen TVs (made on the cheap in places like China, Korea, Mexico and Taiwan), designer clothes (sewn in places like Bangladesh, Hong Kong and Turkey) and luxury rides (often built in Mexico and Canada). It means access to foods that are not grown in America or that are out of season much of the year, but nevertheless available 365 days now.

Without access to low-cost labor, many of the products we take for granted in America are not products most Americans would be able to afford. Or worse … the products wouldn’t exist because the cost structure would be too high relative to the quantity of potential buyers, or wages would be sharply higher in America in order to afford those pricier products (with the end result being pretty much no different than where we are today in terms of income versus spending capacity).

Start wrapping all these foreign-made goods in tariffs, however, and life will change for the worse for American consumers, American business and their workers, and for the U.S. economy and stock market.

Squeezing the American Consumer

At the end of the day, tariffs are a tax on consumers. Period.

If a Trump tariff adds 35% to the cost of a Mexican-made TV — or if it adds 45% to a Chinese-made TV or 10% to a Korean TV — then the cost of that TV will rise by a similar amount in Wal-Mart and Best Buy.

You and I cover that cost. (And for a variety of reasons, it’s not like LG or Sony or Samsung are going to rush to build TV production plants in America, because that would require access to electronic parts that are all made overseas, which necessitates paying the tariffs and shipping costs to import those goods, leading to high-priced TVs here at home … and, for similar reasons, it’s not like those parts-makers are going to start opening plants all over America.

Taken to the extreme, we end up in a closed economy, in which everything we want is produced locally, including all the component inputs, and that’s just illogical, impractical, highly inflationary and only a step or two removed from a Soviet-style economy.)

With the new tariffs, we end up with inflation that causes the Federal Reserve to raise interest rates. Both of those realities — inflation and higher rates — sap the consumer’s ability to spend, which cuts off the most important fuel in our consumer-oriented economy.

It also breeds retaliation as Mexico, China, Canada and others impose tariffs on American products. That hits U.S. multinationals, shrinking their sales and profits, which leads Wall Street to demand layoffs and cost cutting. Stock prices fall, and the stock market retreats.

Stock Sucker Punch

That’s where we sit today as we approach the great unknown of a Trump presidency: Will he or won’t he unleash tariffs as his preferred weapon for attacking other nations economically and trying to strong-arm companies into building production plants in America?

The market until now has placed its bets on the best of all possible outcomes — that Trump will make America great again.

But if making America great means undermining other countries through tariffs and punitive taxes on the products they make, then you and I and the U.S. stocks we own are going to be the real victims.

It all begins next Monday.

Until next time, good trading…
Jeff D. Opdyke
Editor, Total Wealth Insider