A Risky Bet

What they have to do is build their car plants, frankly, and other things, in the United States, in which case they will have no tariffs. 

- Donald Trump

President Trump has said that there is a simple way to avoid his tariffs - move everything back to the US.  His thinking is that this will single-handedly restore the manufacturing sector and create jobs. 

Where to start?  Visit a modern automobile assembly plant and you won't find a worker hefting and bolting a left rear wheel on a car with an impact wrench.  Robots outnumber workers and the remaining jobs require a higher skill set and oftentimes a two year degree from a community college. 

Domestic manufacturing reached its apex in 1979 at 19.6 million jobs.  In the following couple of decades 2 million jobs were lost to automation.  With China's entry into the global trading system another 6 million manufacturing jobs were displaced from 1998 thru 2010.  Today, according to the Bureau of Labor Statistics only 8 percent of America's work force sees the inside of a factory.

Complicating this picture are tax policies that Increase the cost of raw materials such as steel and aluminum.  And with an economy running at full employment we do not yet have a comprehensive immigration policy.  Machines, software advances, and AI technology will continue to revolutionize manufacturing efficiencies.  Wage support and employee benefits have been on the decline for decades - largely a consequence of a decline in union membership.

In his first term Trump tariffs on cheap Chinese goods made limited progress with a surge of 411,000 jobs before the COVID shitshow.  Biden used a mix of subsidies and tax incentives surging manufacturing jobs to a peak of 12.9 million in 2023, only 110,000 above Trump's peak.

Reversing four decades of industrial policy overnight is a heavy lift - corporate America has seen global integration as the most efficient mechanism for producing what the American consumer wants. 

Are CEOs ready to change their business model?  Lower wage overseas labor has left domestic companies with extra cash; that has gone to shareholders in the form of dividends and the repurchase of shares - boosting share prices.

Trump's tariffs would amount to one percent of US gross domestic product (GDP); amounting to the largest tax increase ever.  Imagine the impact on household finances and the ripple effect on the economy.  No doubt tariffs are a mechanism to make it costlier to do business beyond our shores; nevertheless, it is a very blunt instrument and exceedingly difficult to reverse decades  of complex assembly and supply chains between the US and our largest trading partners.

It costs $ billions and takes years to construct and populate any substantive manufacturing facility.  It takes years to recoup those investments.  Tariffs and presidents are much too transient for business to make that kind of risky bet.  Stable long-term policy-making hasn't been the realm of American politics.

Meanwhile the markets are sending a clear signal they don't like the uncertainty.  It will be interesting to watch this play out.....