Noah, I'd love to hear more about what capacity the USA and Europe have for local drone manufacturing. What kinda volumes are the USA and Europe hitting? What could the USA hit if shit hits the fan? What was Ukraine able to spin up and how fast?
I believe the USA has had a block on the big Chinese drone firm for a while, has that helped spur local manufacturing?
More specifically, it would be good to hear Noah's take on domestic battery and microprocessor output increased by the cumulative spending spurred by the Dem/Biden IRA and CHIPS Acts. Batteries and chips being two strategic resources integral to drone manufacturing.
Also: How likely is it that Trump will follow through on his pre-election threat to destroy CHIPS? Or that Trump/GOP will do the same to IRA?
Yes. Great article, btw. Perhaps you could have some of your Natsec experts weigh in on exactly what sort of batteries + microprocessor output that will be provided by all the new; fabs either built or in the pipeline.
I mean, we know how many SSN's & SSBN's our yards can build in a year...But what about drones? What kind of increased drone output are we now looking at in light of IRA & CHIPS?
Some of your other readers, btw, are arguing that since IRA is about EV batteries, that it will have zilch benefit to drone manufacturing. Is this true?
From the GOP there's one answer to all of these questions: DEI. Yes, all those uppity and unqualified female, black and gay DEI hires. Just like the ones accused of causing the DC plane crash.
My guess is CHIPs lives (it was bipartisan legislation that actually started in Congress under Trump) but much of the IRA dies (already seeing EV subsidies suspended)
Different IP and completely different assembly line due to component sizes, but sure, if Ford or Toshiba decided to develop the IP to get into that business they could- over many years.. I think the issue is that there aren’t many American companies today that produce the batteries for drones. I could see the Japanese and Koreans getting into that business if we paid them to do it, but instead we are paying them to assemble EV batteries so we can pay a rich geezer to buy it.
Also- much of what Biden is paying for is American labor assembling Chinese components (or components made here with Chinese IP). It was more about union jobs rather than R&D and industrial capacity.
How should other countries respond to threatened tariffs? The same 25% tariff right back? What would be the consequences of this vs alternatives? Tariffs don't exactly cancel out. What could/should both governments then do with the tariff revenue....
That depends on a lot of things, actually! It depends on whether they run a surplus or a deficit, what their objective function is, how big the other country is, and so on! In the case of the U.S., imposing retaliatory tariffs on agricultural products is probably going to be the most politically effective move, given the power of rural states in America's Senate.
When threatened by Trumpian tariffs, other countries should do what Mexico and Canada just did: brown-nose with real gusto. Genuflect, flatter, apologize, move troops around, promise to interdict all fentanyl shipments (even if, as in Canada's case, there are none), and swear undying devotion.
Then pray that Trump is sufficiently mollified to revoke or pause the threatened tariffs. Or that something shiny catches his eye and distracts him.
But the best way to influence our President is to pay him and/or his party a lot of money. Like Elon and Yass did a few months ago. Which is probably why the newest China tariffs were only 10%, instead of the much higher figures he'd been floating during last year's campaign.
Where are all the ActBlue texts when we need them? We need to collect billions into a BribeTrump2025 fund and just purchase sensible economic and social policy from the MAGIdiots.
So you noticed that 25% on Canada/Mexico and 10% on China will actually hurt Tesla's rivals, more than Tesla. Sounds like Elon got his money's worth.
And Congress passed and Biden signed the bill which set up the sale or closure of TikTok. The timeline last Fall of the last (rejected) court challenges to the sale meant that Biden passed implementation to the next administration. Which was also a political poison pill, so if Trump defied Congress and the courts, Dems could say, "Yass paid Trump/GOP $50 million in '24 to stop the sale. And like a corrupt Oligarch, he did."
This depends very much on the objectives of the threatening country and its willingness to bear the cost of going through with the threat. Sometimes (not February 2025, unfortunately) the objective is something that is beneficial to the threatened country such as a reduction in an import restriction or export subsidy In which case the response should be to give in to the threat.
When the threat is something mutually prejudicial the analysis is much more difficult and has to include consideration of making a mutually prejudicial counter threat.
Hit the nail on the head- consumption decreases (in real terms) or savings decreases and government deficits shrink. Easy to see why tariffs are not inflationary (other than one off price level change) under that scenario unless either fiscal or monetary policy is loosened in response.
We know we need to cut deficits - a tariff is a targeted tax hike.
Do governments give some of that back to consumers or in handouts or industry?
Thanks! This is very interesting and I admit I still need to read the Second China Shock blog carefully.
The National Security perspective is something that as you noted is not modeled in economics and I think it would be an interesting perspective on how to rationalize the use of tariffs.
I also would like to add a theory that shares aspects with Pettis' perspective based on what we refer to as the Global Financial Resource Curse (https://www.aeaweb.org/articles?id=10.1257/aer.20211792). I also wrote about this in my substack (https://open.substack.com/pub/gianlucabenigno/p/the-global-financial-resource-curse?r=nm3g&utm_campaign=post&utm_medium=web&showWelcomeOnShare=false). According to this framework, trade deficits driven by capital inflows from China to the U.S. lead to a reallocation of resources away from manufacturing, ultimately dampening productivity growth and lowering real interest rates both in the U.S. and globally. While tariffs are not a first-best policy, they can improve outcomes compared to the unregulated equilibrium we describe in the paper. I hope you find this of interest.
On the last theory, Noah questioned whether tariffs would effect de-dollarization, but didn't address the question of whether de-dollarization is a good thing. I would think that controlling the world's trade currency is an advantage the US wouldn't want to give up. Can someone explain why we might?
Maybe I’m missing something obvious, but I don’t think that post (which I read when it came out and found very interesting!) answers my question. You wrote about devaluing the dollar, but the question was about de-dollarizing international trade. These things don’t seem to be completely orthogonal, but neither are they clearly the same.
Creates massive demand for dollars, which increases value of the dollar, which makes it more expensive to manufacture here, which makes exports less competitive and imports cheaper, which leads to de-industrialization.
Ultimately, demand for the dollar depends on America’s desirability as a place to invest (which, of course, is relative - how do alternatives rank in terms of return, safety, liquidity)
Also, the world’s reserve currency probably isn’t going to be from a country with a trade surplus - the math doesn’t work.
I think they *are* a necessary ingredient to promote re-shoring of manufacturing, but what we need are *targeted* tariffs on specific products from China instead of broad tariffs on all kinds of products from all kinds of countries.
Noah, would like to hear your thoughts on the Lighthizer column in the NYT today. It laid out an interesting proposition that is a good bit at odds with this column.
In essence, at what point do the three reasons for “good tariffs” result in abuse and does his column come up with a decent way to assess and deal with that condition…or not?
Thanks—PS really find your posts interesting and informative
I read his op-ed, and I think his arguments are very similar to those of Pettis. I think I did a good job articulating my views on that way of looking at international trade:
I think the best rationale to support Lighthizer's recommendations are in his last paragraph:
"The people who unfairly benefit from the current system will argue that such a system would not work. But we have done it their way for decades, and that has failed. It is time to try something different."
I also think it is a mistake that the debate so far has been all at the macro level. I think there are some positives for the tariffs at the micro level if you pair it with proposed income tax reforms. Trump promised no income taxes on overtime, tips, and social security. I assume the thinking is that the tariffs will pay for this. A LOT of people will end up paying significantly less income tax, and many of them will likely end up without having income tax withholdings on their paychecks because they will fall below the individual standard deduction and their gross income will be reduced. This should offset the cost of the higher prices. Rent, fuel, utilities and insurance take up most of their paychecks anyway, and most of that is unaffected. Higher income salaried people will still pay income taxes and more for their tariffed BMW. Thus, we are redistributing the tax burden to the wealthy. I'm thinking this will be fairly popular and I find it curious that it is being left out of the debate.
There was one argument under the ‘national security’ category that you did not mention. That is, the use of tariffs to crush the economy of a trading partner in order to extract one-sided concessions or even just soften them up for a takeover attempt. Not sure Trump really wants Mexico, but I suspect he likes the idea of imperialist expansion and acquisition of Canada. I don’t think it will ultimately work, but I do think Canada can look forward to continued crushing blows that damage our economy significantly.
He has hinted at what some of the one-sided concessions would include. Since US banks can already operate in Canada, I suspect his banking remarks relate to allowing a foreign bank to purchase one of our larger banks outright. Telcos would follow perhaps.
Certainly he has long mused about taking our water.
Great post as usual Noah. You are an exceptional economics explainer, and we need that now more than ever! One quibble: I do wish you’d be more specific when you talk about “deindustrialization“ in the US, as you often do. You should be clear that that’s in terms of employment only, not output. (https://fred.stlouisfed.org/graph/fredgraph.png?g=1DsGa&height=490). As it pertains to things like national security, it is our capacity to produce that matters, not our share of the workforce in manufacturing. The deindustrialization of employment is driven largely by technology, and that technology would let us produce a heck of a lot of military goods if we needed it to.
Thanks, Jason! The chart you linked to shows that U.S. industrial production peaked in 2008 and has been declining for almost two decades. If that's not deindustrialization, what is?
Also, in my post, I make it clear that I'm talking about the destruction of *specific strategic industries*, not industrial production as a whole.
La Niña arrived but instead of associated cooler temperatures, January was the hottest on record. But let’s instead focus the inverted yield curve. In the meantime, Trump pulls the U.S. out of the Paris Climate Agreement. Muskovites are attacking NOAA. We can look forward to Trump using Sharpies to redraw NOAA Hurricane spaghetti maps.
Silicon Valley leaders’ anthem is “move fast and break things.” Really? Why do they resist anti-trust actions that would move fast and breakup Silicon Valley monopolies? History has shown that when extremely large monopolies are broken up, an era of new era of technology and innovation ramps up. Instead, much of the effort of monopolies is to purchase startups and competitors to widen moats. We can worry about legislative capture, but the real goal is competition capture.
As a parent of young kids, levying tariffs feels like when you yell at or punish your kids. If it succeeds in modifying their behavior, then yes it works. But it offers no real direct benefits and makes both parties somewhat more miserable.
It’s reallllly starting to feel like we’re heading down the same path of the 1930’s. RBIO seemingly gone. Tariffs/trade wars galore. Political instability in the west and expansionist powers in the East. Tech changing rapidly (tanks being replaced with drones and we’ve got AGI).
“Tariffs help domestic manufacturers by protecting them from foreign competition, but they hurt them by driving up the cost of their imported components. This is one of the two big problems with tariffs — the other one being that they drive up consumer prices.”
I know this is just throat clearing, but it’s still important to completely clear the throat. Noah points to the effect of tariffs in raising the relative prices of a) substitutes of tariffed imports, b) inputs of firms that are tariffed goods (or he might add, their substitutes) and c) consumer goods that are imported with tariff or which are substitutes of goods imported with tariff. He really should also have included the reduction in the relative prices of a) exported goods and their substitutes and b) imports of goods without tariffs -- tariffs are never uniform -- and their substitutes. The damage that tariffs do applies as much to relative price reductions as increases.
Moreover, without Fed action the shock to the economy of a set of tariffs, like any other shock, can generate non-clearing markets unless the Fed steps in with accommodating inflation which is itself an opportunity to create either too much or too little inflation, an additional source of economic loss and uncertainty.
In weighing the costs and benefits of tariffs to achieve an objective it is important to include ALL their costs and benefits compared to all the costs and benefits of other policy instruments for achieving the same objective.
WRT strategic industries -- especially military / national defense focused industries -- it would be useful to the understand the relative efficacy of tariffs compared to direct government subsidy of either specific "national champions" or strategic sectors (advanced chips, battery manufacturing, etc.). Congress resorted to tariffs as a way to protect and nurture young industries because the federal government did not have access to significant revenue sources until the income tax in the first half of the 20th Century. Direct support of strategic industries seems on its face both more efficient and more fair, since the revenue to pay for the support would be collected via a progressive income tax, ensuring that those with the "most to lose" are paying the most to support the industrial development required to avoid those losses.
The richer China gets, the less competitive it will be as an exporter due to higher labor costs. I wonder if any kind of crude equilibrium analysis has been done to estimate the point at which China gets “stuck,” unable to export more without getting priced out. Obviously they will still have the advantage of an entrenched supply chain for many products, but still…
They're much less competitive now, which is why their companies' profits are collapsing. But cheap bank loans and subsidies go a long way, and they're not dramatically *uncompetitive*. So this is a window in which tariffs may help.
What about tariffs as a tool to advance the political and economic power of the Grifter-in-Chief?
The pattern we're seeing is that Trump is wielding broad-based tariffs as a political weapon, the best legal weapon he has because he has the sole discretion to use them. So he'll keep using the threat and use of tariffs to get political victories (both performative and substantive) on the international scene and for his MAGA base domestically. But what we're also seeing is that he's starting with broad-based tariffs and then negotiating exceptions (the lower rate for Canadian oil is his now-withdrawn Canadian tariff package) for practical reasons (inflationary impacts) and -- here's what worries me, for it's easy to see this pattern emerging as well -- for deal-making with the leaders of dominant firms. This will set the stage for that previously-overused term by the left = oligarchy. See Musk, Bezos and Zuckerberg. Where economists see "champions," we might see those dominant firms, already politically powerful, become transactional grifters in league with, but also subservient to, the Grifter-in-Chief.
This is in reference to your last post wherr, even though Elon Musk is very clearly breaking several laws, you decided to describe his actions as "who knows if this is even illegal, Trump.told him he could do it, so black letter law doesn't apply anymore. "
Basically, I find it harder lately to trust your generally excellent analysis on other topics when you have spent the past two weeks acting like Elon Musk is still a stand-up guy.
You wrote very convincingly about the need for a tiktok ban, both for its information ecosystem effects as well as its proven record of turning over user data to the CCP.
Now, when Elon Musk, who the CCP has a ton of leverage over, gets access to all of the government's data, you can't even bring yourself to say it's a bad thing or unlawful.
Noah, I'd love to hear more about what capacity the USA and Europe have for local drone manufacturing. What kinda volumes are the USA and Europe hitting? What could the USA hit if shit hits the fan? What was Ukraine able to spin up and how fast?
I believe the USA has had a block on the big Chinese drone firm for a while, has that helped spur local manufacturing?
Definitely going to write more about this!
More specifically, it would be good to hear Noah's take on domestic battery and microprocessor output increased by the cumulative spending spurred by the Dem/Biden IRA and CHIPS Acts. Batteries and chips being two strategic resources integral to drone manufacturing.
Also: How likely is it that Trump will follow through on his pre-election threat to destroy CHIPS? Or that Trump/GOP will do the same to IRA?
I wrote about that here!
https://www.noahpinion.blog/p/biden-did-stuff-and-it-looks-like
Yes. Great article, btw. Perhaps you could have some of your Natsec experts weigh in on exactly what sort of batteries + microprocessor output that will be provided by all the new; fabs either built or in the pipeline.
I mean, we know how many SSN's & SSBN's our yards can build in a year...But what about drones? What kind of increased drone output are we now looking at in light of IRA & CHIPS?
Some of your other readers, btw, are arguing that since IRA is about EV batteries, that it will have zilch benefit to drone manufacturing. Is this true?
Consider the case where Trump shuts down CHIPS and IRA then.
What will TSMC now making chips Phoenix say to the Republicans like Andy Biggs and Paul Gosar in Scottsdale?
What will voters say when that half built bridge and half paved road are left ?
And finally whst will the unemployed construction workers say?
From the GOP there's one answer to all of these questions: DEI. Yes, all those uppity and unqualified female, black and gay DEI hires. Just like the ones accused of causing the DC plane crash.
DEai has a few legitimate issies. But are miniscule compared to what the Right poses them to be.
My guess is CHIPs lives (it was bipartisan legislation that actually started in Congress under Trump) but much of the IRA dies (already seeing EV subsidies suspended)
We don’t make many of the small batteries that go into drones. We are pushing EVs.
Did you see the new graphite battery maker? Bought a big factory in USA for this recently
here is link btw https://electrek.co/2023/05/15/north-america-graphite-factory-georgia/
There's many different sizes of batteries, for different sizes of drones.
Are you saying an EV battery plant can't be (quickly) retooled to make smaller batteries?
Different IP and completely different assembly line due to component sizes, but sure, if Ford or Toshiba decided to develop the IP to get into that business they could- over many years.. I think the issue is that there aren’t many American companies today that produce the batteries for drones. I could see the Japanese and Koreans getting into that business if we paid them to do it, but instead we are paying them to assemble EV batteries so we can pay a rich geezer to buy it.
Also- much of what Biden is paying for is American labor assembling Chinese components (or components made here with Chinese IP). It was more about union jobs rather than R&D and industrial capacity.
Worked with auto engineers US and globally since the 70s
If GM and Ford decided that they needed to make 10,000 drone batteries a day, they'd do it in 12 months. Same with drones.
How should other countries respond to threatened tariffs? The same 25% tariff right back? What would be the consequences of this vs alternatives? Tariffs don't exactly cancel out. What could/should both governments then do with the tariff revenue....
That depends on a lot of things, actually! It depends on whether they run a surplus or a deficit, what their objective function is, how big the other country is, and so on! In the case of the U.S., imposing retaliatory tariffs on agricultural products is probably going to be the most politically effective move, given the power of rural states in America's Senate.
When threatened by Trumpian tariffs, other countries should do what Mexico and Canada just did: brown-nose with real gusto. Genuflect, flatter, apologize, move troops around, promise to interdict all fentanyl shipments (even if, as in Canada's case, there are none), and swear undying devotion.
Then pray that Trump is sufficiently mollified to revoke or pause the threatened tariffs. Or that something shiny catches his eye and distracts him.
But the best way to influence our President is to pay him and/or his party a lot of money. Like Elon and Yass did a few months ago. Which is probably why the newest China tariffs were only 10%, instead of the much higher figures he'd been floating during last year's campaign.
Where are all the ActBlue texts when we need them? We need to collect billions into a BribeTrump2025 fund and just purchase sensible economic and social policy from the MAGIdiots.
So you noticed that 25% on Canada/Mexico and 10% on China will actually hurt Tesla's rivals, more than Tesla. Sounds like Elon got his money's worth.
And Congress passed and Biden signed the bill which set up the sale or closure of TikTok. The timeline last Fall of the last (rejected) court challenges to the sale meant that Biden passed implementation to the next administration. Which was also a political poison pill, so if Trump defied Congress and the courts, Dems could say, "Yass paid Trump/GOP $50 million in '24 to stop the sale. And like a corrupt Oligarch, he did."
Canada's threat of politically-focused tariffs (specifically going after industries concentrated in Trump-supporting states) seemed pretty sensible.
This depends very much on the objectives of the threatening country and its willingness to bear the cost of going through with the threat. Sometimes (not February 2025, unfortunately) the objective is something that is beneficial to the threatened country such as a reduction in an import restriction or export subsidy In which case the response should be to give in to the threat.
When the threat is something mutually prejudicial the analysis is much more difficult and has to include consideration of making a mutually prejudicial counter threat.
Hit the nail on the head- consumption decreases (in real terms) or savings decreases and government deficits shrink. Easy to see why tariffs are not inflationary (other than one off price level change) under that scenario unless either fiscal or monetary policy is loosened in response.
We know we need to cut deficits - a tariff is a targeted tax hike.
Do governments give some of that back to consumers or in handouts or industry?
Thanks! This is very interesting and I admit I still need to read the Second China Shock blog carefully.
The National Security perspective is something that as you noted is not modeled in economics and I think it would be an interesting perspective on how to rationalize the use of tariffs.
I also would like to add a theory that shares aspects with Pettis' perspective based on what we refer to as the Global Financial Resource Curse (https://www.aeaweb.org/articles?id=10.1257/aer.20211792). I also wrote about this in my substack (https://open.substack.com/pub/gianlucabenigno/p/the-global-financial-resource-curse?r=nm3g&utm_campaign=post&utm_medium=web&showWelcomeOnShare=false). According to this framework, trade deficits driven by capital inflows from China to the U.S. lead to a reallocation of resources away from manufacturing, ultimately dampening productivity growth and lowering real interest rates both in the U.S. and globally. While tariffs are not a first-best policy, they can improve outcomes compared to the unregulated equilibrium we describe in the paper. I hope you find this of interest.
On the last theory, Noah questioned whether tariffs would effect de-dollarization, but didn't address the question of whether de-dollarization is a good thing. I would think that controlling the world's trade currency is an advantage the US wouldn't want to give up. Can someone explain why we might?
I wrote about that here!
https://www.noahpinion.blog/p/how-to-devalue-the-dollar
Maybe I’m missing something obvious, but I don’t think that post (which I read when it came out and found very interesting!) answers my question. You wrote about devaluing the dollar, but the question was about de-dollarizing international trade. These things don’t seem to be completely orthogonal, but neither are they clearly the same.
Creates massive demand for dollars, which increases value of the dollar, which makes it more expensive to manufacture here, which makes exports less competitive and imports cheaper, which leads to de-industrialization.
Ultimately, demand for the dollar depends on America’s desirability as a place to invest (which, of course, is relative - how do alternatives rank in terms of return, safety, liquidity)
Also, the world’s reserve currency probably isn’t going to be from a country with a trade surplus - the math doesn’t work.
Great post, but I would like to see more to refute the argument that tariffs are a necessary ingredient to promote re-shoring of manufacturing
I think they *are* a necessary ingredient to promote re-shoring of manufacturing, but what we need are *targeted* tariffs on specific products from China instead of broad tariffs on all kinds of products from all kinds of countries.
Noah, would like to hear your thoughts on the Lighthizer column in the NYT today. It laid out an interesting proposition that is a good bit at odds with this column.
In essence, at what point do the three reasons for “good tariffs” result in abuse and does his column come up with a decent way to assess and deal with that condition…or not?
Thanks—PS really find your posts interesting and informative
I read his op-ed, and I think his arguments are very similar to those of Pettis. I think I did a good job articulating my views on that way of looking at international trade:
https://www.noahpinion.blog/p/the-pettis-paradigm-and-the-second
I think the best rationale to support Lighthizer's recommendations are in his last paragraph:
"The people who unfairly benefit from the current system will argue that such a system would not work. But we have done it their way for decades, and that has failed. It is time to try something different."
I also think it is a mistake that the debate so far has been all at the macro level. I think there are some positives for the tariffs at the micro level if you pair it with proposed income tax reforms. Trump promised no income taxes on overtime, tips, and social security. I assume the thinking is that the tariffs will pay for this. A LOT of people will end up paying significantly less income tax, and many of them will likely end up without having income tax withholdings on their paychecks because they will fall below the individual standard deduction and their gross income will be reduced. This should offset the cost of the higher prices. Rent, fuel, utilities and insurance take up most of their paychecks anyway, and most of that is unaffected. Higher income salaried people will still pay income taxes and more for their tariffed BMW. Thus, we are redistributing the tax burden to the wealthy. I'm thinking this will be fairly popular and I find it curious that it is being left out of the debate.
There was one argument under the ‘national security’ category that you did not mention. That is, the use of tariffs to crush the economy of a trading partner in order to extract one-sided concessions or even just soften them up for a takeover attempt. Not sure Trump really wants Mexico, but I suspect he likes the idea of imperialist expansion and acquisition of Canada. I don’t think it will ultimately work, but I do think Canada can look forward to continued crushing blows that damage our economy significantly.
He has hinted at what some of the one-sided concessions would include. Since US banks can already operate in Canada, I suspect his banking remarks relate to allowing a foreign bank to purchase one of our larger banks outright. Telcos would follow perhaps.
Certainly he has long mused about taking our water.
Great post as usual Noah. You are an exceptional economics explainer, and we need that now more than ever! One quibble: I do wish you’d be more specific when you talk about “deindustrialization“ in the US, as you often do. You should be clear that that’s in terms of employment only, not output. (https://fred.stlouisfed.org/graph/fredgraph.png?g=1DsGa&height=490). As it pertains to things like national security, it is our capacity to produce that matters, not our share of the workforce in manufacturing. The deindustrialization of employment is driven largely by technology, and that technology would let us produce a heck of a lot of military goods if we needed it to.
Thanks, Jason! The chart you linked to shows that U.S. industrial production peaked in 2008 and has been declining for almost two decades. If that's not deindustrialization, what is?
Also, in my post, I make it clear that I'm talking about the destruction of *specific strategic industries*, not industrial production as a whole.
La Niña arrived but instead of associated cooler temperatures, January was the hottest on record. But let’s instead focus the inverted yield curve. In the meantime, Trump pulls the U.S. out of the Paris Climate Agreement. Muskovites are attacking NOAA. We can look forward to Trump using Sharpies to redraw NOAA Hurricane spaghetti maps.
Silicon Valley leaders’ anthem is “move fast and break things.” Really? Why do they resist anti-trust actions that would move fast and breakup Silicon Valley monopolies? History has shown that when extremely large monopolies are broken up, an era of new era of technology and innovation ramps up. Instead, much of the effort of monopolies is to purchase startups and competitors to widen moats. We can worry about legislative capture, but the real goal is competition capture.
As a parent of young kids, levying tariffs feels like when you yell at or punish your kids. If it succeeds in modifying their behavior, then yes it works. But it offers no real direct benefits and makes both parties somewhat more miserable.
It’s reallllly starting to feel like we’re heading down the same path of the 1930’s. RBIO seemingly gone. Tariffs/trade wars galore. Political instability in the west and expansionist powers in the East. Tech changing rapidly (tanks being replaced with drones and we’ve got AGI).
And we have William fucking McKinley as POTUS.
“Tariffs help domestic manufacturers by protecting them from foreign competition, but they hurt them by driving up the cost of their imported components. This is one of the two big problems with tariffs — the other one being that they drive up consumer prices.”
I know this is just throat clearing, but it’s still important to completely clear the throat. Noah points to the effect of tariffs in raising the relative prices of a) substitutes of tariffed imports, b) inputs of firms that are tariffed goods (or he might add, their substitutes) and c) consumer goods that are imported with tariff or which are substitutes of goods imported with tariff. He really should also have included the reduction in the relative prices of a) exported goods and their substitutes and b) imports of goods without tariffs -- tariffs are never uniform -- and their substitutes. The damage that tariffs do applies as much to relative price reductions as increases.
Moreover, without Fed action the shock to the economy of a set of tariffs, like any other shock, can generate non-clearing markets unless the Fed steps in with accommodating inflation which is itself an opportunity to create either too much or too little inflation, an additional source of economic loss and uncertainty.
In weighing the costs and benefits of tariffs to achieve an objective it is important to include ALL their costs and benefits compared to all the costs and benefits of other policy instruments for achieving the same objective.
WRT strategic industries -- especially military / national defense focused industries -- it would be useful to the understand the relative efficacy of tariffs compared to direct government subsidy of either specific "national champions" or strategic sectors (advanced chips, battery manufacturing, etc.). Congress resorted to tariffs as a way to protect and nurture young industries because the federal government did not have access to significant revenue sources until the income tax in the first half of the 20th Century. Direct support of strategic industries seems on its face both more efficient and more fair, since the revenue to pay for the support would be collected via a progressive income tax, ensuring that those with the "most to lose" are paying the most to support the industrial development required to avoid those losses.
The richer China gets, the less competitive it will be as an exporter due to higher labor costs. I wonder if any kind of crude equilibrium analysis has been done to estimate the point at which China gets “stuck,” unable to export more without getting priced out. Obviously they will still have the advantage of an entrenched supply chain for many products, but still…
They're much less competitive now, which is why their companies' profits are collapsing. But cheap bank loans and subsidies go a long way, and they're not dramatically *uncompetitive*. So this is a window in which tariffs may help.
What about tariffs as a tool to advance the political and economic power of the Grifter-in-Chief?
The pattern we're seeing is that Trump is wielding broad-based tariffs as a political weapon, the best legal weapon he has because he has the sole discretion to use them. So he'll keep using the threat and use of tariffs to get political victories (both performative and substantive) on the international scene and for his MAGA base domestically. But what we're also seeing is that he's starting with broad-based tariffs and then negotiating exceptions (the lower rate for Canadian oil is his now-withdrawn Canadian tariff package) for practical reasons (inflationary impacts) and -- here's what worries me, for it's easy to see this pattern emerging as well -- for deal-making with the leaders of dominant firms. This will set the stage for that previously-overused term by the left = oligarchy. See Musk, Bezos and Zuckerberg. Where economists see "champions," we might see those dominant firms, already politically powerful, become transactional grifters in league with, but also subservient to, the Grifter-in-Chief.
Luckily, noted South African man and shadow president is for these tariffs so Noah Smith is OK with them.
Matthew this whole post is an explanation of why Trump's tariffs are bad. I say that over and over. Come on, man.
This is in reference to your last post wherr, even though Elon Musk is very clearly breaking several laws, you decided to describe his actions as "who knows if this is even illegal, Trump.told him he could do it, so black letter law doesn't apply anymore. "
Basically, I find it harder lately to trust your generally excellent analysis on other topics when you have spent the past two weeks acting like Elon Musk is still a stand-up guy.
You wrote very convincingly about the need for a tiktok ban, both for its information ecosystem effects as well as its proven record of turning over user data to the CCP.
Now, when Elon Musk, who the CCP has a ton of leverage over, gets access to all of the government's data, you can't even bring yourself to say it's a bad thing or unlawful.
It is baffling.