For all of the smoke that is the Trump administration, there’s very little fire. He seems to specialize in two things. First, he’s all over deconstructing the Obama legacy, possibly in retaliation for Obama dissing him at a White House Correspondents dinneror some other slight. He purposely forgets his own work in the birther movement which Obama totally demolished by releasing his birth certificate. Second, Trump really likes re-issuing past successful programs like the moon mission. He’s all about going back to the moon, as a first step to Mars though he has little concept of why the US should be pouring money down that rathole again.
Some of Trump’s efforts are less obvious but one that we should all pay attention to is his tariff program. It’s not the first time we picked a fight with a competitor from Asia but Trump would be smart to ask what we learned from placing quotas on Japanese cars in the 1980s before the tariff war goes too far. The car thing didn’t work out well for us and the tariffs have yet to prove themselves so we should all be nervous.
Tariffs and caps
To be sure, there is a difference between tariffs and quotas. A tariff lets a foreign vendor import as much of its products as it wishes into another economy BUT it requires a fee or tax on the transaction paid for by the consumer. A tariff makes foreign goods more expensive but does not limit supply to the consumer so it preserves the vendor’s market share albeit at a higher price point. As long as consumers are willing to pay the tariff, the foreign vendor can continue selling in the target country.
Countries involved in importing goods might benefit from the tax revenues paid on the imported goods, but the nations those people inhabit lose out because the tariffs cost them directly and do not necessarily do much to promote a competitive domestic industry.
On the other hand, placing a cap on the number of goods that can be imported might have some good points. Initially, with a cap in place the supply of a foreign good is curtailed making the goods that manage to be imported more valuable in the eye of consumers and so the unit prices might rise.
Strengthening demand can signal the foreign vendor that it would be in its interest to build local or domestic production facilities in the target country. In the long run more factories and domestic production can add jobs to the local economy thus keeping both the domestic market well served, the local workforce employed, and the vendor happy. We saw this scenario 30 years ago with Japanese imports especially in cars.
The first Asian tiger to roar wasn’t China but Japan. The country re-introduced itself on the world stage at the 1964 Olympics in Tokyo as a nation rebuilt after the devastation of WWII. In the years that followed Japanese management and investment made the nation one of the top global exporters, making everything from steel to ships to cars and a good deal of electronics. It was a classic economic ladder climbing exercise and it was managed well.
The Japanese manufacturing renaissance relied in part on the strength of American ideas like the statistical manufacturing and management techniques touted by W. Edwards Deming. In contrast, Americans were slow to adapt Deming’s ideas and by the 1980s the Japanese were selling way too many cars to Americans hungry for models that sipped gas and didn’t break. Detroit had turned a deaf ear to the customerand couldn’t supply what the market demanded, hence a trade imbalance as Toyotas, Hondas, Nissans and other name plates arrived on US shores.
Politicians and unions screamed about unfair trade practices and demanded action. The approach then was to limit through a voluntary quota system, the number of cars the foreign car companies could import but the tactic backfired badly.
Rather than import fewer of their lower cost cars, the Japanese car companies developed luxury brands and began importing them so that their unit profits were improved by the quotas. Meanwhile, many foreign car makers began building factories in the US so that they could satisfy domestic demand with domestic production.
In the face of all that competition, the US car makers didn’t redouble their efforts to compete but instead hid behind the quota system, which only lasted a few years. It’s debatable, but it looks like the US auto industry never caught up. In 2018 the big three, GM, Ford, and Chrysler had just under 44.5 percent of the market. In 1980, GM alone had 44.2 percent of the market.
There are reasons to place quotas and tariffs on foreign goods and fair trade/free trade are important parts of that discussion. In the 1980’s the US car companies decried Japan’s unfair trade practices citing the lack of reciprocal sales of US cars in the Japanese markets. On a visit to Japan, George H.W. Bush learned the hard way that the Japanese, who drive on the left side of the road and needed cars with steering wheels on the right, weren’t buying US car models in part because the steering wheels were on the wrong side.
The quota system was at best a face-saving move by the US government attempting to shore up a vital industry and it failed in part because of greed and foot dragging. Redesigning American cars to be lighter and more fuel efficient was a big and expensive undertaking for the US makers. They eventually came around but at the cost of losing significant market share.
Today’s Trump tariffs are a nuisance for China because in some markets there are no more US producers. If China’s products become too expensive due to tariffs, business is more likely to go to producers in other nations. It’s less likely that US manufacturing will see a resurgence of manufacturing washing machines for instance.
This kind of thing is as old as economics. Products become commodities and they are made in the places where costs are lowest. Often that’s outside of the US even though America might have invented a category. For instance, TV manufacturing left the US decades ago when manufacturers had to decide on reinvesting in plant and equipment that could build really large picture tubes. Tubes were a dying technology and the decision not to pursue bigger ones was smart. Unfortunately, it left the competition in the Far East with an open field for perfecting LCD and plasma displays.
Tariffs are a temporary phenomenon and while they can cause short term market distortion, they aren’t likely to disrupt the market though they will extract more cash from domestic consumers, exactly the people Trump wants to help.
Industries grow from the grass roots and it’s good to be early into them. Early movers capture market share and hold it for a long time while later entrants deal with scraps. The Asian manufacturers have been taking scraps from American manufacturers for a long time, but all indications are that the Asians are in position to lead in new industries like solar panels, wind turbines, electric cars, and much more. The solution is not tariffs or quotas but determined competition. It worked well in Information Technology and Telecommunications over the last 50 years. But in the process, some may have for gotten the importance of building industries and that is a danger sign for domestic workers over the next 50 years.
(Cross-posted @ Denis Pombriant | Medium)