MANUFACTURING HIGHER TARIFFS, OMG!

Rumors of the demise of the US manufacturing industry are greatly exaggerated. ~ Elon Musk  

Recently President Biden decided he can help American manufacturers by momentously raising US tariffs on certain imported Chinese goods. I lament this action. Yet the importance of our economy’s manufacturing sector has been perennially bellowed by many.

Manufacturing is the process of fabricating goods by manual labor and/or machinery. Humans have been manufacturing objects for thousands of years. Predecessors of Homo sapiens created stone tools 200,000 years ago. About 3,000 years ago during the Bronze Age dagger blades were manufactured using an alloy of copper and tin (aka, bronze), shown below. In this era, technology every so gradually evolved over multiple centuries. Needless to say, since those not really good ol’ days technological advance has speeded up big time.

Bronze Age dagger blade. Wikipedia.

 When President Biden boasted in December 2023 that “We’ve created close to 800,000 manufacturing jobs since I’ve taken office” his statement passed several verifications.[1] But he was not talking about workers creating more modern dagger blades. He was hailing his extensive, multi-billion dollar government-funded industrial policies. His programs are focused on loans and subsidies to manufacturers who are building domestic semiconductor fabrication plants, EV subsidies to help domestic auto-makers, increased green energy production to stymie climate change and good ol’ infrastructure enhancements to shorten our daily commutes.

Most recently, the president has promoted substantial increases in American tariffs on Chinese EVs and batteries (to 100%) and solar panels (to 50%) to protect and assist domestic manufacturers. It’s another political nail sealing the doorway to free trade that a decade ago was a popular and proven prescription for gaining national benefits. Most economists recognize that when tariffs are imposed on imported goods they represent an additional, indirect tax in the form of higher prices ultimately paid by consumers, not manufacturers.

This isn’t the first time elected officials have imposed sizeable tariffs on the US public. The lamentable Smoot-Hawley tariffs were put in place by President Herbert Hoover in June 1930. These big-time tariffs covered over 20,000 imported goods and exacerbated the effects of the Great Depression.

President Biden’s new-found preference for substantial trade protectionism – he voiced disapproval when then-President Trump previously created similar tariffs – will hopefully assist domestic manufacturers. Even if successful, which is by no means certain, such policies will take quite a while to have beneficial effects. These tariffs will certainly produce unintended consequences. Expected consequences include the imposition of retaliatory tariffs by China. Yet the president is quite eager that voters will somehow fondly remember these measures on November 5, even if they’ll eventually pay higher prices as a result. Attempting to recreate the past is never easy.

 The president’s plan to vastly strengthen US tariffs on a broad variety of “strategic” goods imported from China is more targeted to improve his near-term political prospects than attain any specific economic goals. President Biden is using Section 301 of the Trade Act of 1974 that states if the he believes nation’s national security is threatened, he can unilaterally impose or change tariffs. The president believes that in spades; saying his new tariffs will protect American workers and businesses from China's unfair trade practices.

These tariffs will likely result in somewhat higher prices that consumers will face for a broad array of imported items, including solar panels, lithium-ion batteries, semiconductors, steel, aluminum, syringes, needles, personal protective equipment (PPE) and surgical gloves. I didn’t realize surgical gloves and syringes were strategic goods.

If you’re a died in the wool traditionalist like President Biden, manufacturing employment is the only true measure of honest labor. Manufacturing employment peaked in 1979 when 19.6M people worked at making goods. It’s been a long time since manufacturing has been the actual core of our economy. Service industries now account for 80.3% of total employment. Hoping to reinvent yesterday won’t happen even if you’re the president.

When considering the state of US manufacturing, it’s important to distinguish between manufacturing output and manufacturing employment. In April 2024, only 8.2% of US workers were employed in manufacturing. Manufacturing employment has steadily declined during the 7 decades since 1953, when it hit its peak 32% share of total non-farm employment. The Bureau of Labor Statistics forecasts US manufacturing employment will continue declining to merely 7.5% of all workers by 2032.

Manufacturing output however has defied economic gravity and held steady principally due to impressive increases in automation with consequent improvements in the sector’s productivity, relative to the overall economy. Domestic manufacturing output has kept a roughly 10% share of our real (price-adjusted) GDP. This increased use of automation/robotics in manufacturing means a substantial majority of manufacturing workers now are highly-skilled and well-trained.

I’d like to believe the president’s much-elevated tariffs will not result in weighty economic harm. I also wish these misguided actions might serve to strengthen his election prospects, but doubt they will. Even though the media does its best to make it seem like November 5 is the day after tomorrow, it remains 156 days away at this point.

Tariff policy per se never captures more than an ever so slender sliver of voters’ attention. Higher consumer prices due to these tariffs however will gain attention of far more people. Finally, misdirected actions like the president’s higher tariffs pale in comparison to what’s ahead if a now-convicted felon succeeds him after election day. So it goes…

 

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[1] I won’t quibble with the president, although it’s more accurate to say 589K manufacturing jobs were recovered from the thankfully-brief Covid recession, and 175K new jobs were created. However you slice it, a great many manufacturing jobs have been gained during the president’s time in office.