US President Donald Trump has declared two objectives for his tariff-raising rampage. One is to raise revenue with which to pare down the US national debt (“We will make America rich again”). The other objective is to revive an American manufacturing sector that in Trump’s opinion has been weakening over the years.
Trump has described how his tariffs – they are Trump’s personal tariffs because the US Congress, a co-equal branch of the US government, thus far has had no say whatsoever in the structuring and execution of US trade policy in the Trump 2.0 administration – will lead to the restoration of American industrial supremacy.
So-called reciprocal tariffs would be set at levels so high – 10 percent for all the countries and territories of the world, except China, the European Union (E.U.), the United Kingdom (UK), Canada, Mexico, Japan and South Korea, for which the tariffs will be higher – that many, if not most, of the world’s businessmen would start thinking of establishing or relocating manufacturing plants to the US to avoid having to pay a tariff.
By President Trump’s calculation, American companies that in the last half-century have put up manufacturing plants overseas – especially in the Indo-Pacific area and in Latin America – would bring their manufacturing operations back to the US in the wake of his tariff campaign and the companies of Europe, Northeast Asia and Australia would in Trump’s view rush to establish manufacturing operations in the US
America’s Chief Executive is going to be disappointed because what he expects to happen – a big rush to the US – is not going to. Donald Trump got it wrong.
Of course, Trump’s tariffs are consequential and will figure prominently in American and foreign businessmen’s analyses of their companies’ operational prospects. But close down their overseas factories and bring their manufacturing operations back to the US? I don’t think so.
Just as men do not live by bread alone, so company chairmen and chief executive officers (CEOs) do not live by tariff, or threats to impose tariffs, alone. Tariff are an important part of their corporate diet, but they are by no means the only part thereof. A tariff is only one of numerous factors in the decision-making equation regarding a manufacturing plant’s location.
Competitiveness being the name of the world trading game, a company’s board of directors as a rule decide to locate a new manufacturing facility where it can manufacture its product least expensively. There’s little economic point in manufacturing a beautiful and technically admirable product that cannot compete price-wise against a similar European or South Korean product.
The issue of American industrial competitiveness has risen and fallen, and will continue to rise and fall, on the cost of labor. Labor cost usually being one of the largest components of the cost of manufacturing a product, a company will first consider the wage structure in a country before making a decision to put up a plant there.
By definition, wages in the US, Canada, Europe and Northeast Asia are higher, often much higher, than wages in the rest of Asia, Latin America and Africa. Unless there is some other major factor to be considered in the decision-making process – such as a desire to keep the supply chain short or protect a special market – an American or European or Japanese manufacturer will be more inclined to establish a plant in Thailand or Colombia or Kenya than at home or in another developed country. The saving in labor cost will outweigh the amount of a new or threatened tariff.
Deciding on where to manufacture a product is not like turning a switch on and off. Closing down a plant located in a foreign country and moving the manufacturing operations back to the US is a very difficult corporate decision to make. Chairmen and CEOs don’t like to make such a decision under threat of an adverse government action like the imposition of a tariff.
As they assess the potential impact of Trump’s tariff threats on their companies’ operations in the coming days, America’s corporate leaders doubtless are also looking at the element of time. Donald Trump will be gone in four years, notwithstanding his incomprehensible chatter about a third term. Most of the chairmen and CEOs almost certainly are thinking that the current aberration in US economic policymaking will be brought to an end by the next White House occupant.
Globalization has been very good for the world economy. Donald Trump is out to defeat globalization and bring the world economy back to mercantilism. He will fail. Globalization will prevail.