This morning I woke up to the ABC News headline “Ford CEO Says Trump Threats Won’t Change Small Car Plans.” Having spent the last 7 years hammering together a new theory of economics in order to make sense of the historic success of protectionism, I could not help wonder if the marketing of tariffs is in need of a public relations makeover. In a nutshell, using tariffs as a “threat” to keep domestic producers from fleeing is misplaced, because it does not address the price advantage foreign competition has over domestic producers in the first place. Instead of focusing on the specific behavior of individual companies–a hopeless task in the long run–sky-high tariffs must be sold as a macroeconomic solution across all industrial sectors as a reward for restoring national security and prosperity.
Let’s break down some of the key aspects of this proposition by first clarifying two types of tariffs. Traditionally, tariffs were either categorized as revenue generating for the federal government or as prohibitive (high enough to prevent the import from being competitive on the domestic market). The revenue approach could make sense for a geographically limited imports such as a rare earth mineral, or something that does not present a threat to the industrial base, such as coffee. It is critical to protect industry, because all growth, including service sectors rely on industrial gains (e.g. the traveling salesman gasoline and automotive costs). Or in exaggerated terms, there was no service sector before the invention of farming tools, because we were all subsistence farmers.
But for this discussion, of interest is the protective tariff which would allow the full restoration of all industrial sectors. For example, a tariff on TVs would be prohibitively high so that all TV manufacturers would out of necessity have to set up shop on US soil in order to remain competitive. The same logic applies to countries such as Mexico, because the Mexican worker loses by intensive exports (he can no longer consume what he produces). In my interpretation of healthy macroeconomics, the producer must rely on the purchasing power of his nation’s citizens in order to avoid a return to the dark world of English subsistence wages in the 1700s which the classical school of economics struggled to make sense of and gave Marx a foothold to destroy capitalism, or to a world of plantation economics where cotton exporters did not need to rely on the purchasing power of their slaves. Thus in modern practical terms, a car manufacturer will create plants in each respective country in order s create the needed purchasing power to sell the cars domestically. Mexico, in my opinion, needs to focus on education which promote engineers and scientists to support such macroeconomics. This is real wealth production, not the black magic of free trade theorists which relies on a deeply defective understanding of money known as the Quantity Theory of Money in my view.
The core issue sky-high protectionist tariffs solves regarding daily headlines is the inability of tax breaks to compete with radically different wage differentials between nations. While a tax break may be a temporary micromanagement bandage, I would suggest a 10 to 1 wage differential cannot be compensated by tax reductions which might reflect a 25% cost saving on the bottom line. For example, a domestically produced product valued at $200 which can be produced overseas for $20, still remains noncompetitive at $150 following a massive tax break. Note also protectionism restores the tax base instead of cutting it. The foreign manufacturer who presently pays no domestic taxes would be forced to contribute to the domestic tax base by establishing shop here at two levels (i.e. corporate tax and workers wages).
In short, the tax-driven approach in my view cannot in the long run restore the critical aspects of healthy domestic wage dynamics, worker mobility, and sector size adjustments; this is something only tariffs can restore, because as I’ve argued elsewhere money is a purely domestic phenomenon reflected in domestic cost of production. As a result, instead of “threatening” our wealth producers with “punitive” tariffs, it’s time to “reward” all industrial sectors with “protective” tariffs across the entire industrial base. Manufacturers from around the globe will establish shop here and ensure a healthy a competitive environment.
As always, critique welcome.