What’s the Problem With Tariffs?
There are quite a few, but I’ll concentrate on the biggest one: supply chains.
A supply chain is essentially an enormous international assembly line. An iPhone, for instance, uses components from 43 different countries, which means 43 countries are stations on that phone’s assembly line. Pieces of the phone come from here, there, and everywhere. And this is true of many, many modern consumer goods, from an automobile to a package of smoked salmon. While an early twentieth-century telephone was probably made in one country – maybe two or three: maybe they imported some of the metal or rubber – a modern phone is made in dozens of countries. Why? Because it saves money. That wasn’t true during the McKinley Administration, when transportation was expensive, but now, when we have airplanes and trucks and highway systems and cargo-container tanker ships, transportation is enormously cheaper than it used to be, so companies can chase the best deal all over the globe.
Is that a good thing or a bad thing? Depends. If you live in California, and would like to work in a factory which produces 100% of an iPhone, you’re out of luck, because a lot of that work can profitably be farmed out to places like China or India. On the other hand, if you’re someone who wants to buy an iPhone, the model on sale at Best Buy is a lot cheaper than it would be if it were built exclusively in California. In general, the trading system has evolved as it has to optimize efficiency, and efficiency makes things cheaper.
The current system probably also makes iPhones better than they would otherwise be, because Apple has an international array of competitors, and the competition keeps it on its toes. In the early days Apple had to worry about Nokia, which is based in Finland; now I imagine they spend plenty of time thinking about Samsung, which hails from South Korea. Because companies from all over the world compete to sell us smartphones, those phones are both cheaper and higher-quality than they would be if they were made by a single company in Rutherford, New Jersey. Anybody remember the Yugo? That was a car made in Communist Yugoslavia, which had an economy protected from competition. The Yugo wasn’t much of a car.
What does all this have to do with tariffs?
Tariffs, especially ones of the size President Trump has proposed, take a meat axe to supply chains. If you’re Apple, what do you do if 42 of your 43 supplier-countries suddenly face huge tariffs, so that their components shoot up in price? The reader might suggest that Apple build some factories in the U.S.. But it takes years to build a factory, and the new tariffs are happening in a matter of days. What does Apple do in the meantime? They (a) try to manage the chaos, which won’t be easy, and may suddenly make iPhones hard to get; and (b) raise prices, probably by a lot. Furthermore, since the old system evolved to optimize efficiency, what replaces it will most likely be less efficient. Maybe it will have other virtues to compensate – maybe some American workers will get new factory jobs – but you can expect less efficiency to result in lower quality and higher prices. That’s what happens when you try to skew a market.
Remember the inflation shock in 2022? One big reason was the Russian invasion of Ukraine: sanctions on Russia raised the price of oil and natural gas, which raised all kinds of other prices. But the other big reason for that year’s inflation was that China had a major COVID outbreak, which led to a number of lockdowns, including of Shanghai, which has the largest port in the world. A whole lot of supply chains run through Shanghai. If you remember the price of used cars going through the roof, a lot of that was about those lockdowns: prices went up because supply chains got scrambled, and manufacturers were suddenly missing crucial components, which made new cars scarce. It was like an assembly line that has one of its machines break.
The tariffs, if they go through, will scramble a lot more supply chains than got scrambled in 2022. This isn’t one big port going down for a couple of weeks: this is the two biggest economies in the world, America and China, going to economic war with each other. Their economies have supply chains which are interlaced and intertwined like cables under New York City. Furthermore, the other countries we’re tariffing are part of supply chains, too. The world economy contains supply chains the way the human body contains veins and arteries. Something like this? It’s like the world economy having a stroke.
~ STUDEBAKER (Studebaker@studebakerguy.bsky.social)
