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Tariffs: Reality Check

In 1776 Adam Smith stated:

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. If a foreign country can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

This is the natural order of economics. Tariffs attempt to disrupt this law of economics. Tariffs adjust wages by imposing a tax that amounts to an economy adjustment. The need for tariffs are supported by the argument that since people in lower wage economies make pennies on the dollar compared to workers higher wage economies then higher wage economies will experience high unemployment relative to the lower wage economy. Well, this doesn’t hold true based on economic theory established by David Ricardo in 1810 and supported empirically.

A labor force in a higher wage economy specializes and it gains improvements in efficiencies in the things it does well. Consider the wage economics in manufacturing Nike shoes versus aerospace products.

According to Matthew Kish in his May 20, 2014 article, Nike pays its contract factory workers in Vietnam $73.94 per month, which is on the higher end of the pay scale for shoe factory workers (workers in Bangladesh make $36.01 per month as reported in the same article). This wage equates to $0.43/hour based on a typical U.S.A. labor year of 2,080 hours. Manufacturing shoes requires unskilled and semi-skilled labor to manufacture; therefore the barrier to entry is low. The Vietnam-U.S.A. wage disparity is impossible to overcome, so it is highly unlikely that Nike shoes will be manufactured in the U.S.A.

According to Statista, as compiled using data from Congressional Research Service the U.S.A. exports over $15 Billion worth of aerospace products and parts to China and this volume is growing year over year. The average aerospace manufacturing machine operator makes $30.17 per hour or $5,229 per month according to the U.S. Department of Labor Bureau of Labor Statistics. Manufacturing aerospace products is highly specialized and manufacturers are constantly improving efficiencies in manufacturing thereby creating a high barrier to entry.

In April 2010, Phillippe Martin, Thierry Mayer, and Mathias Thoenig published that free trade agreements result in political peace because the opportunity cost for war is too high. The authors go onto state that economic and security gains are complimentary and if trade gains are not realized then security benefits are jeopardized.

The bottom line is American are not likely to accept $0.43 per hour to make shoes and Chinese workers and infrastructure are not prepared to make $30.17 per hour making aerospace products. It is highly unlikely that tariffs will create long-term, meaningful changes to trade imbalances based on the two basic examples provided. Tariffs can jeopardize U.S. security interests in Asia, such as the South China Sea, Taiwan, Korean Peninsula, Japan, etc. since the opportunity cost for conflict is lowered. Part of the current U.S. trade dispute with China centers on technology theft.

When I lived in Malaysia I was witness to Chinese theft of U.S. technology. It is my opinion that technology theft is far more complex than a tariff driven solution can provide.