An Extreme Case of Ignorance or Something Else?
By Pierre Lemieux
by Pierre Lemieux
If half the American car markets is now supplied by foreign factories, it is obviously because the latter have a comparative advantage in the lines of vehicles they are selling to Americans. The destruction of this comparative advantage would mean higher costs and higher prices.
The Commerce Department will study imposing a tariff of as much as 25% on foreign-manufactured cars in the name of national security as it did for steel and aluminum (“Trump Tariff Threat Vexes Allies and Global Auto Makers,” Wall Street Journal, May 24, 2018). Commerce is thereby obeying President Donald Trump, who tweeted a few hours before, clearly suggesting that national security is a thinly veiled excuse:
There will be big news coming soon for our great American Autoworkers. After many decades of losing your jobs to other countries, you have waited long enough!
What could explain this new protectionist threat?
One reason could be ignorance of basic economics. Perhaps Trump and his advisors believe that if a tariff of 25% is imposed on foreign made cars, American consumers will have a choice between imported cars costing 25% more and domestic cars at today’s price. Except for a few rich eccentrics, they will choose the latter, and the domestic car industry will double its production, which now accounts for slightly over 50% of the U.S. car market. Everybody will be happy, except for foreign car manufacturers.
Of course, this is not what would happen. To produce more cars, domestic manufacturers (which include foreign car companies’ manufacturing plants in America) face an increasing marginal cost, as is generally the case. (If that were not true, they would have already increased production and cut prices–until a single company monopolizes the market.) They would have to bid up the prices of the supplementary resources they need: aluminum, steel, workers (already in short supply in a fully employed economy), etc. At the new equilibrium price, which would move to as much as 125% of the previous price (depending on the weight of America in the world car demand and on the elasticity of supply and demand), the number of American made cars will increase, displacing a certain volume of foreign made cars. There would still be only one price for similar cars, domestic or foreign, following the law of one price.
More foreign car companies might build factories in America or expand the ones they already have. But this is just another way to say that manufacturing cars would be more expensive; otherwise the foreign manufacturers would have already moved more production to America without the need of new protectionist threats. If half the American car markets is now supplied by foreign factories, it is obviously because the latter have a comparative advantage in the lines of vehicles they are selling to Americans. The destruction of this comparative advantage would mean higher costs and higher prices.
Instead of being the victim of straight ignorance, perhaps Mr. Trump is simply deluded and creates his “alternative facts” as he goes. The effect is the same.
Another reason lies with the special interests trading their support to Trump for higher salaries. The “American Autoworkers” would see their salaries bid up. The United Auto Workers already indicated their desire to work with Trump to protect the American car industry in NAFTA negotiations. The shareholders of American car companies know that the disruption in supply chains caused by new tariffs would cost them dearly. Many of these companies import some of their cars from their foreign plants–one fourth in the case of GM. So domestic car companies now take the side of their customers, the American consumers.
A third reason may be that the new threat is just another bargaining stance to bring foreign governments to open their markets to American car manufacturers, even if the latter are apparently happier with freer trade than with protectionism. The threat may very well not work and further increase the risk of a trade war and a recession. And note how the bargaining stance takes Americans hostage. American officials are saying to foreign governments: “If you don’t open your markets for our producers (and electoral clienteles), we will hurt American consumers”–assuming they understand the consequences of their interventions.
A fourth possible reason would be that the new protectionist threat is a political theatre for Trump’s Midwest supporters. The President would appear to be doing something for them as midterm elections approach, even if the legally required investigation and study (under the national-security justification of the Orwellian-named Trade Expansion Act of 1962) cannot be finished by that time. After the election, Trump would find an excuse for not following up on the car-protectionism threat. This would be another political fraud in an ocean of political lies (not limited to this administration, of course, but arguably more brazen).