The Achilles Heel of Trump's Tariffs

This article was first published by me on Talkmarkets:

The Trump Tariff plans have an Achilles Heel. We know that there are basic weaknesses that can be found in all tariff plans. For example, the consumer in the US is very weak, tariffs have failed in history, etc. But the real weakness of the plans for our time is the global supply chain.

As auto companies turn on Trump, we are learning more about them. General Motors has said it may have to shrink the presence of its operations in America, and we can read into this, to avoid tariffs from Europe and the rest of the world.

Cars made in the USA are loaded with a certain percentage of foreign parts. It is this supply chain reality that makes it impossible for companies like Kia to put more factories in the US while tariffs are in place. The investment would be huge, and immediately roughly 30 percent of the car would be subject to tariffs. America Made Index shows that the most American car, the Jeep Cherokee, percentage wise, still has 28 percent of parts from elsewhere. This will raise prices on all American pickup trucks as well, which already carry a protective 25 percent tariff which shoves prices upward!

Unfortunately for the American auto image, Toyota and Asian imports are the least expensive cars to maintain, so made in America also comes with a big repair tariff-like expense!

I suppose Donald Trump could test this Achilles Heel. It almost seems that he wants to because he wants to pull out of the World Trade Organization. He wants to institutionalize his policy.

United States Manufacturing Continues to Grow But at a Slower Rate. Watch This Indicator if Tariffs Ramp Up.

Moody's has warned that Trump tariffs may cause a credit downgrade of automakers: 

“Tariffs on imported cars, parts would be broadly credit negative for industry.“ A 25% tariff on imported vehicles and parts would be negative for nearly every segment of the auto industry — carmakers, parts suppliers, car dealers, and transportation companies … Should any tariffs be levied, carmakers would need to absorb the cost to protect sales volumes while hurting profitability; increase prices to pass the tariff costs to customers, which could hurt sales; or a combination of both.”
And it will be difficult to price autos for sale, with the inability to pass on all the costs, and with the complexity of what parts of the car is subject to tariffs and which parts of the car are not. The Examiner reports:

Incorrectly using the Section 232 provisions will "put the U.S. manufacturing sector at a global disadvantage," the National Association of Manufacturers told the Commerce Department on Friday. The group, which represents companies that contribute $2.25 trillion to the U.S. economy and employ 12 million, warned of fallout including higher production costs, reduced exports, lower production and declining employment.
Indeed, retaliation for U.S. tariffs on cars might prompt GM and other automakers with international sales to move jobs outside the country to avoid the penalties, just as Milwaukee, Wis.-based Harley-Davidson decided to do earlier this week, earning a volley of critical Twitter posts from President Trump.

History is on the side of tariff failure. Some have been extended far beyond what Donald Trump has done so far, according to supply chain expert and consultant Jim Szakacs, with dreadful results:

...this would not be the first time that the United States has passed similar tariffs with the same expectation to increase the employment rate. The McKinley Tariff of 1890 increased the import tariff by 30 percent but ultimately caused a drop in the gross domestic product (GDP) while unemployment skyrocketed. The Fordney-McCumber Tariff of 1922 attempted to do the same but this time the global community retaliated by increasing their tariffs as well thus reducing American exports. Again, in the heart of the Great Depression, the Smoot-Hawley Tariff was passed as a protectionist measure that ultimately caused a 67 percent drop in American exports followed by a 40 percent drop in GDP. History often repeats itself and we’ve seen first hand the historical impact of increased tariffs on American exports and trade. Considering we thrive in a much more dynamic global economy than we did during the Great Depression, the impact would likely be immediate.
The fact that tariffs have failed in the past without, I repeat, without the complexity of current supply chains almost certainly dooms the Trump misguided escapade.

With regard to pharma, Szakacs says this:

The pharmaceutical industry in particular would require significant restructuring and investment to move the bulk of manufacturing back to the United States, the costs of which would ultimately be passed onto the consumer. Another consideration is the fact that innovation has created a manufacturing process that relies heavily on factories with minimal personnel and robots working 24/7 on drug production. These “jobs” would not reduce the human employment rate if they returned to the United States. And to add insult to injury, many pharmaceutical components, or active pharmaceutical ingredients (APIs), for generic drugs are manufactured in China before being shipped back to the United States for assembly.
The American public simply has not much clue about the costs and the failure of the promise of "build in America" that they face as a nation. It is time that the media attempt to education people. This is a situation in which people will not know what hit them because it will not necessarily be felt immediately and prices could impact them suddenly. Also the credit of important companies could be tarnished, affecting many stocks.

We have to hold out hope that this tariff tiff will all come to an end before it gets really serious. But no nation seems to be backing off publicly. And Donald Trump appears to be frustrated with the betrayal he sees from American companies, starting with Harley-Davidson. But American auto workers have nearly doubled since 2011 according to the Hill blog. Trump is endangering what is already a growth industry for America.

For further reading:

The Economics of Canned Beer: Why Tariffs Will Wreck International Trade


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