Liberation Day?

Liberation Day?

Trump calls April 2^nd “Liberation Day”. That is when his tariffs go into effect. I guess it is obvious why he did not pick April 1^st. Liberation is defined as “an occasion when something or someone is released or made free.” So what are we being released from or made free from?

Trump is putting a 25% tariff on all automobiles imported into the country. That matches the duty on pickup trucks imposed by Lyndon Johnson in 1964 that is still in effect today. I thought that he would cut BMW a deal since their largest plant is in South Carolina. But no. The company has announced that in the short run it will eat the tariff. Its popular M3 is made in Mexico and the average tariff on it will be $10,000. Trump has threatened the automobile makers not to raise the prices of their vehicles. Yet the increased costs of the tariffs will be greater than the profit made on cars sold. Would they then stop importing vehicles from Canada and Mexico because you can’t make up those loses on volume? The tariffs will wipe out both Ford and GM’s profits. Oops.

Trump’s tariffs obsession makes me wonder about his business acumen. He said that the automakers should be grateful for the elimination of Biden’s pivot to electric vehicle production. Yet the automobile industry embraced electric vehicles (both Ford and GM) because it eliminated a large portion of the workforce and would ultimately reduce the cost of producing vehicles because of fewer moving parts. Trump also said that they would benefit from the tariffs because of bringing manufacturing back to the U.S. Huh? Tariffs are generally used to keep the competition out, not encourage them to come into the country. Then Trump got really delusional when he said “You’re going to see prices going down, but it’s going to go down specifically because they’re going to buy what we’re doing, incentivizing companies and even countries with companies to come into America.” Huh? The automakers left the country because of high costs. Bringing all auto production into the states will raise the costs of cars, not lower them.

Trump wants all the automobile companies to move their manufacturing to the US. First, they will have to build the plants which will take a few years even with Trump putting them on a fast track. Second, they will have to find workers. Third, will BYD and Polestar be allowed to build the plants in the US that they were planning to build in Mexico? Fourth, if they shut down the plants in Mexico, the automakers may have to get special work visas to bring the workers in from Mexico to work in the new plants.

I guess they didn’t teach comparative advantage at Penn. That tells us that if Trump were successful in cajoling manufacturing back into the US that the final products will be more costly being produced here than abroad. Consider the apparel industry that has seen a shrinkage in employment from about 925,000 workers in 1990 to less than 84,000 today. BTW, what happened to the displaced workers? Did they all go on unemployment and stay there? Of course not. Regardless, can Trump’s tariffs bring this industry back from Southeast Asia? Doubtful. But what if he did. Would apparel cost the same or more? Consider the t-shirts made by US-based American Giant are sold at Walmart for $12.99 while t-shirts from Southeast Asia are sold for $4.98. The foreign t-shirt can be manufactured abroad and shipped to the US and still cost one-third of the same shirt made in the US. The difference is labor cost which is 3 times more. The same will be true with autos. If Honda decides to make its Civic hybrid in Indiana rather than Mexico or if other car makers move their production into the US, automobiles will cost more. This will lower the real income of the American consumer. 

The avocado industry moved from California to Mexico because of labor. Once that labor flowed freely across the Mexican border to harvest avocados. Then the US tightened up its immigration enforcement stopping the flow. As a result, the workers were forced to stay in the US making them illegals or remaining in Mexico and trying to sneak across the border. The result was a dearth of agricultural workers forcing the companies to move their production into Mexico. Now Trump’s tariffs won’t bring the industry back to California unless he reinstitutes the rules allowing for the free flow of migrant workers. Now won’t that be ironic? Forcing production back into the US and having to import workers from Mexico.

Again I thought with all the business people in Trump’s cabinet that he would not go through with this nonsense. But I guess its more important to some to just go along with the boss in order to be in the Cabinet. They probably know that manufacturing leaves developed countries and is not necessarily related to trade deficits – like Trump thinks. Consider that in Germany between 2000 and 2024, manufacturing jobs fell while the country went from a trade deficit to a trade surplus. Likely they are too afraid to tell this to Trump. 

Trump says that we will get a lot of money from the tariffs. Again he didn’t learn this from his economics courses. The increase in the price of goods will mean that the quantity demanded will fall. Economics says that if demand is elastic then total revenues will be lower. Trump is assuming that demand will stay the same at the higher prices resulting from the tariffs. They taught this at Penn? He needs to talk to Art Laffer. No wonder consumer confidence is falling. No wonder the stock market is moving into correction territory. No wonder the dollar is depreciating in foreign exchange markets.

Liberation Day? Hardly, more like liberation from reality.