This is the second part of the discussion on Tariffs that I started in – Tariffs and more – Part 1 (March 13, 2025). In the first part I considered some of the historical motivations including the infant industry argument. Today, I plan to expand on that discussion and add further considerations that might help us understand what is going on at the moment.
The Fortune article (March 16, 2025) – Trump claims tariffs will make the U.S. ‘rich again.’ But 5 undisputed facts about how they work throw cold water on that notion – listed the five principle objections that economists have against tariffs:
The most common argument is that they “are a tax that will be mainly, if not wholly borne by U.S. consumers”.
This is the most obvious objection – that it forces the domestic consumer (including users of imported raw materials) to pay more than they have to for the product or input.
The train of events is clear – the foreign company exports product A into the US and if subject to a tariff the payment will be made by the importer (usually incorporated in the local economy).
There are several possibilities then.
The exporting firm absorbs the tariff impost and passes the good onto the importing firm at a lower price.
Many economists think this is likely because the US market is so large that foreign firms can reduce per unit margins (absorb the tariff) while making it up on volume.
Under certain circumstances the local importer may absorb some or all of the tariff impost.
Alternatively, the local importer passes on the tariff charge to the final price of the good.
Which of those alternatives turns out to follow the tariff impost depends on the state of the global market, the state of the local market and more.
This 2020 study of Trump’s first term tariffs – Who’s Paying for the US Tariffs? A Longer-Term Perspective (published January 2020) – found that
… recent U.S tariffs have been passed on entirely to U.S. importers and consumers … We find heterogeneity in the responses of some sectors, such as steel, where tariffs have caused foreign exporters to drop their prices substantially, enabling them to export relatively more than in sectors where tariff passthrough was complete.
So it depends on the sector.
Trump’s justification is that the ‘tax’ imposes costs on the foreign entities, which is somewhat true if local consumers have locally-produced alternatives and substitute away from the imported good.
But the whole point of the tariff is to make any locally produced goods commercially viable (by being able to operate at higher unit costs behind the tariff wall, which effectively addresses the difference in unit costs between the local and foreign producers.
But if there is already a commercially-viable local product available, then there is no need for the tariff protection.
Such protection would just go to profits of the corporation.
Australia had a long history with tariff protection, as I explained in – Tariffs and more – Part 1 (March 13, 2025).
When the federal government first started widespread protection around 1917, the motivation was various but the overriding aim was to provide an incentive for “Australia’s existing horse-drawn carriage manufacturers (and their 7,000 or so employees) to make car bodies instead” (Source):
The next step to tariffs was designed as an ‘infant industry’ strategy but there were several problems with the strategy.
The Australian market was small relative to say the US market where several firms in the same sector could achieve economies of scale (lowest unit costs).
In Australia, the tariff walls meant that the infants never really matured.
They had no incentive to innovate much because their profits were protected and the government introduced few incentives or penalties to encourage rationalisation or innovation..
They could also avoid industrial action by unions by agreeing to share out the ‘rents’ (excess profits) that the tariff wall provided them.
So by the 1970s, import competition from Japan (particularly) in the motor car industry was such that the imported product was superior and was offered at a lower price to consumers despite the tariff wall.
At that point, one realises that the tariff strategy had largely failed in terms of its original mission.
The federal government began too late to require the protected industries to innovate and reduce their local costs in return for the protection.
But there are nuances to that as I explain below.
There was an interesting article on the Australian Broadcasting Commission page this morning – How Australia’s leather boot manufacturing industry has changed (March 17, 2025) – which documents the demise of a once robust leather products (boots and shoes in particular) industry in Australia.
There are now very few manufacturers in this trade left as the traditional firms shifted their operations to countries with cheaper labour and also cut the quality of the materials used.
The demise of many local firms in this part of the textiles sector in the 1980s onwards was not unique.
When the then Labor government cut tariffs on imports, which had protected the firms by allowing them to maintain higher price levels as they continued to agree to higher wages, the firms were no longer able to sustain profits.
There were two-sides to the situation:
1. The manufacturing jobs were well paid and secure (at the time) – so workers benefitted from growing real wages (generally in line with productivity improvements).
2. But as consumers the same workers and others paid higher prices for goods than they would have paid in other countries, given the disparity of cost structures.
The tariff wall was highly protective and it was not only higher prices that were the issue.
There was a joke around when I was a student that if you parked an Australian made car on the top of a crest, the front would sag down one side of the slope and the back the other, such was the quality of cars manufactured here.
It was not until the first wave of Japanese imports came and threatened to out price the Australian-made cars even with the high tariff walls that local car makers started to put in heaters and radios to their vehicles.
The tariff-protected Australian-made cars were from memory (I was young) pretty primitive.
And that was the problem – the infant never really grew up.
By the 1970s it was estimated that the government subsidies and other protections were so large that the government could have ‘saved spending’ by closing the industry down altogether, while continuing to pay the workers.
Such was the level of protection.
Even as the protection rose, employment levels fell in the face of the import competition.
However, to just blame the reduction in the tariff wall as the reason, for example, that the Australian car manufacturing industry has disappeared is only one part of the story.
The car industry in Australia also received large subsidies from the federal government.
They were also removed progressively as the obsession with fiscal surpluses grew from the late 1970s and Australia signed up to various ‘free trade’ agreements that prohibited state aid.
Another problem that is not often understood is that the local manufacturing plants were foreign-owned – GM, Ford, etc.
I was consulted some years ago by a group that wanted the federal government to nationalise one of the large plants after it decided to end subsidies and the foreign owner shut the local production down.
At the time, imported cars were quite cheap relative to the locally-produced vehicle.
This group explained to me that the local price included two cost elements: (a) franchising licence charges from the headquarters in the US on the local subsidiary; (b) costs relating to the design team that was located in Melbourne, Australia yet was the major industrial design capacity for the foreign-owned company’s operations abroad. Only a small component of those costs were actually allocated to the local product.
While I cannot recall the exact figures they were something (with a few thousand $A) like this.
The local family sedan sold in the Australian market for around $A49,000.
Net out the franchising costs and the overseas design costs and the same vehicle could be produced and taken to market for around $A15,000.
So the local products were massively subsiding the profits of the foreign-owned operations.
This sort of cost-shifting across corporate structures and national borders is clearly a common accounting trick.
The consortium that approached me wanted to make the case that if the federal government purchased the plant that was being scrapped and maintained the operations and the employment levels, it could still offer highly-paid, skilled jobs to local workers and more than compete on price with the imported competitors.
It was a compelling argument that the federal government rejected because they claimed it would ‘damage the budget’ – an argument so asinine that one could just laugh at their cant.
As a consequence, there are no motor cars manufactured in Australia.
And let’s not confuse the issues.
I wasn’t in favour of the massive handouts that the Australian government was giving to the foreign-owned manufacturing corporations producing here.
That was just an elaborate form of blackmail.
The corporations would threaten to shut down unless they received further bailouts.
Successive governments fearing the political backlash would cave in and up the subsidies.
And they just went to the profits of foreign shareholders.
But had the government agreed to the plan put by the consortium wanted to preserve local production and outlaid whatever was necessary to maintain the operations (without the franchise and design imposts) then that would have been very productive expenditure and, of course, the government could have easily achieved that mission had they not been infested with neoliberal thinking.
So there is more to the story than just the tariffs and that should be borne in mind.
This also related to Trump’s claim which he has rehearsed often that:
We’re going to raise hundreds of billions in tariffs; we’re going to become so rich we’re not going to know where to spend that money.
That quote was a throwaway line he gave the press on March 12, 2025.
In other words, he expects the US government will reap a lot of revenue by imposing import duties on goods and services that come into America.
But think about that for a moment.
The US government doesn’t need revenue in order to spend on goods and services.
If the government felt that there were advantages in promoting the ongoing existence of a sector – for example, the automotive sector – on employment grounds, say – then it could do that without tariffs.
If there was a genuine ‘cost’ disadvantage faced by a desirable local producer, then the government could simply offset that advantage and ensure the price remained at the lower imported good price, without tariffs.
That is, it could maintain integrity in the local industry while allowing low-cost imports in and leaving it up to the consumer to choose which they preferred.
I am not saying I support public subsidies for private profit seeking corporations, but an understanding of the currency capacity of the government certainly allows us to understand that there are alternative ways to assisting local corporations without invoking a so-called ‘trade war’.
There are also several reasons why protecting an industry is desirable.
Here are some.
First, there are so-called ‘spill-over benefits’.
These benefits relate to the advantages other sectors enjoy from the maintenance, say, of an automotive manufacturing sector.
They include skill development, which can permeate down through the supply chain.
Also, refining operational management techniques that reduce unit costs could assist other sectors.
And, importantly, R&D outlays by one manufacturing sector can benefit other sectors where similar technologies etc are used.
Research has shown that “the total benefits of R&D are twice as large as the private benefits from this investment, presenting a strong case for public
support for R&D activity” (Source):
Second, there are multipliers associated with specific government outlays that generate output and employment benefits well beyond the initial outlays.
Third, a strong local manufacturing sector is an ‘attractor’ for FDI, which may reduce unit costs.
Fourth, nations with a manufacturing sector are said to have strategic advantages in the case of geopolitical conflict.
This has been an oft-used argument.
That in the case of a war or threat of war manufacturing processes can be quickly retooled to produce weapons etc.
Fifth, to promote ‘fair trade’.
This argument recognises that the conditions of workers in some exporting nations are so appalling, which is the reason there might be a cost-disadvantage for the local firms against the imported products, that government policy should thwart the import of such goods.
However, tariffs are not the best way to achieve that sort of outcome.
It is far better to just prohibit the import of goods that can be identified with production processes that violate human rights.
The other issue is the role of class power and class struggle.
Why should we want our governments protecting corporations that underpay their workers or offer inferior working conditions?
While workers in the manufacturing sector were well paid as a result of the cosy ‘rent sharing’ of the protection provided by the federal government, there are clearly situations where private profit is ‘protected’ and workers are also not well rewarded.
There is never a justification for that sort of policy.
Finally, and relatedly, if the cost disadvantage is the result of the poor investment decisions taken by American industrialists, for example, then pushing the costs of those management failures onto the consumers does not appear to be sound policy.
Creating nationalised industries that provide unit cost benchmarks to ensure profit gouging firms fail is one alternative.
Conclusion
I will write more on this issue another day.
That is enough for today!
(c) Copyright 2025 William Mitchell. All Rights Reserved.
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