About his new tariffs, President Donald Trump said (and repeated in different forms):
“So what they have to do is build their car plants frankly and other things in the United States, in which case they have no tariffs.”
This is seriously misleading.
Recall the standard economic result that a foreign exporter does not typically pay the tariff: it is the importer and ultimately (in our case) the U.S. buyer who pays it. The cost imposed on the foreign exporter lies in lower export sales because of a lower quantity demanded in the US. If, as is usually assumed, American buyers prefer the domestic substitute ceteris paribus, the foreign exporters’ sales will decrease; the value of their productive assets will also decrease and some capital will be reallocated to other economic sectors.
To avoid these costs, the owners of foreign exporting firms may indeed decide to move their plants to the US if the total cost of moving is lower than the cost of reduced sales to America. Moving and building a new plant, and quite certainly losing money on the sales of the old facilities (the owner does not literally move his plant across the border), is costly and takes time. Moreover, production costs will certainly be higher in the US, which is the reason why the firm did not previously decide to produce here—and the owners know more about this than any politician. The cost of moving to the US will be further increased if the American government imposes tariffs on inputs such as steel or aluminum. The uncertainty of ever-changing protectionist policies is another cost component. If the total cost of moving is worth incurring, it is because this cost is lower than the cost to the firm of otherwise lost markets, but it is not necessarily much lower and it is anyway a cost increase compared to the starting situation. The moving firm has to pay a cost equivalent to a tariff, even if lower.
This cost is not called a “tariff” (or a tax) simply because it is not paid by the former exporter to the US Treasury. A tariff is, by definition, a special tax on imported goods. But from the point of view of the exporter who moves to the US, it amounts to the same as paying a tariff—which of course comes over and above what American buyers pay in higher prices.
Mr. Trump’s apparent ignorance of these considerations confirms what the Florida owner of a construction company with 35 employees (for now) said to the Wall Street Journal (Rachel Louise Ensign, Arian Campo-Flores, and Harriet Torry, “Tariff Whiplash Spooks U.S. Consumers,” March 5, 2025):
He has no idea about the economy.
Or, as The Economist puts it more diplomatically,
the president and reality seem to be drifting ever further apart. …
Because his approach lacks any coherent logic, there is no knowing how to avert his threats.
Pursuing the economic issue into its moral dimension leads to questioning the idea that the coercive imposition of a cost is not coercive if the victim can reduce his (or her) cost with avoidance measures, and suggests a few analogies. Consumers who don’t like a tax simply need to stop buying the taxed good, in which case they have no tax to pay. Kidnap victims who don’t like the ransom demanded simply need to not pay it, in which case there is no ransom. East Berliners who don’t want to be shot just have to avoid jumping the Berlin Wall, in which case there is no shooting.
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Unhappy investor moving his plant from Canada to the US
READER COMMENTS
Jon Murphy
Mar 9 2025 at 11:53am
Good stuff, Pierre. One thing to add: the statement that producing within the US means you’ll have “no tariffs” is factually incorrect.
Much of what the US imports are intermediate goods. Trump is happily throwing tariffs on those goods, from raw materials, to semiconductors, to steel, rubber, and all sorts of other inputs. While producers may not face tariffs on their products, their inputs almost certainly will.
Pierre Lemieux
Mar 9 2025 at 2:33pm
Jon: You are right. I could have been more precise on this point. Thanks for emphasizing it. It was however suggested by my sentence:
Jon Murphy
Mar 9 2025 at 4:00pm
I read too fast and missed that sentence.
Warren Platts
Mar 9 2025 at 3:51pm
From my seat in the back row of the bleachers, it appears that President Trump is merely trying to tighten the U.S. labor market in order to goose wages. He does this with two or three mechanisms: (1) end unrestricted immigration (that reduces the supply of labor); (2) try to reshore manufacturing (that increases the demand for labor); and (3) at least try to get a handle on the trade deficit that exports U.S. consumer demand. That should really be the question under discussion: Is the U.S. labor market too tight, or too slack…
Yes, of course, of this raises production costs. Oh the consumers! But consumers are also workers & taxpayers. By putting more money into the pockets of workers, we increase the demand for consumer goods. This is what GDP growth is made from. Also, high wages provide a powerful incentive for owners to invest in new machines that save labor, thus increasing labor productivity (and that is the only path to real GDP/capita growth).
Jon Murphy
Mar 9 2025 at 4:07pm
The problem, then, is none of those three will “goose” wages:
1) Immigration (illegal or otherwise) do not reduce American wages, but increase them (since immigrant labor is a compliment). Reducing immigration will inherently lower wages (as the research has shown time and time again)
2) Reshoring manufacuring will further reduce wages since it is the reshoring of low-productivity (and thus low paying) jobs
3) The trade deficit does not “export consumer demand.”
All of these fallacies are discussed in a good Econ 101 course (the textbook I use in my classes covers all three of these fallacies). If Trump is actually acting on these principles, then his ignorance is confirmed, not refuted.
On a more advanced note:
4) Tariffs necessarily reduce exports as well, so you are not only reducing demand for imports, but reducing demand for high-productivity exports. You’d lose high-paying jobs in favor of low-paying jobs.
Warren Platts
Mar 9 2025 at 4:32pm
Let’s focus: would Trump’s measures tighten the labor market or not?
Jon Murphy
Mar 9 2025 at 6:03pm
No. Employment is unrelated to trade policy. Trade policy changes the mix of jobs (from high income, high productivity to low income, low productivity).
You must love a recession, then.
Jose Pablo
Mar 9 2025 at 8:12pm
Which labor market? there are many
The hospitality labor market? Yeah!, sure there will be great opportunities for Trump voters to work night shifts at hotels and restaurants in San Diego and Albuquerque
Warren Platts
Mar 9 2025 at 4:40pm
And as far as your #4 is concerned, if U.S. exports are reduced because of Trump’s tariffs, that will reduce U.S. consumer prices for those previously exported items. So it’s a wash..
john hare
Mar 9 2025 at 6:06pm
You might want to rethink that. Decreasing the amount sold does not decrease the capital costs of the production. And probably doesn’t decrease the labor absent layoffs. The goods produced will have a higher per unit fixed cost and possibly a higher marginal cost.
Jon Murphy
Mar 9 2025 at 6:14pm
You are right about average fixed costs, but the marginal costs would depend. Many firms are on the upward-sloping portion of the average total cost curve, meaning rising marginal costs. If we assume the average exporter is the same, then at least initially, prices will fall as output falls.
Longer run, it becomes less clear. Supply could fall due to higher input costs (again, most of what the US imports is intermediate goods). In that case, prices will rise.
Either way, what is important is people are made worse off. Fewer goods exist for people to consume, GDP and aggregate demand are both falling. There will be less savings, and consequently less investment, reducing the prospects for long-run growth.
Jon Murphy
Mar 9 2025 at 6:46pm
Eh, maybe. Maybe not. It’ll depend.
Demand for the goods would fall, so that would, all else held equal, reduce the price.
However, all else is not equal. Recall that the reason exports are falling is because of the tariffs. And most of what the US imports are intermediate goods. Those prices are rising, which in turn causes the supply curves of producers to fall. Falling supply would cause prices to rise.
So, it’s a question of which effect dominates.
Of course, one never, ever wants to reason from a price change. Price is not the relevant factor here. Output is. Prices can be low, but if there are fewer goods to consume, people are worse off. Prices are lower in Russia than the US, but that does not imply Russians are better off than Americans. Just the opposite; prices are lower because they are poorer.
Pierre Lemieux
Mar 9 2025 at 6:09pm
Warren: You ask,
With due respect, are you a member of the Gosplan, the State Planning Committee of the former Soviet Union? What about the marriage market, is it too tight or too slack? Is there a US deficit or surplus in the later market or in the international market for love emails? If you are not a member of the Gosplan, but (let’s imagine) a free individual in a free society, you are not interested in these questions. You manage your own labor, your own marriage, your own emails, and your own trade balance.
Mactoul
Mar 9 2025 at 8:47pm
Of course, a completely free market economy requires very few economists, if any. Economist, as a profession, is premised upon central planning. Even in America, I believe, there are well-paying jobs at various federal agencies, where the economists calculate these questions you deem impermissible.
And gutting these jobs, well-paying economist jobs, Musk is trying to gut. Not good for economist profession.
Jon Murphy
Mar 9 2025 at 9:50pm
Your comment presuppositions that the role of science is to serve the state. Yet science predates central planning by millennia.
You claim that the free market needs no economists. Yet one can make a ton of money as a consultant to firms. So, the market disagrees with your assertion.
Warren Platts
Mar 10 2025 at 4:10am
Pierre, you know that I still love you & I still owe you that analysis on Ricardo’s trade theory about how a normal distribution in skill levels completely wipes out the gains from international trade (in his cartoon model). But now it’s time to confess! I’ve been getting love emails from Michael Pettis lately! We Americans need to *manage* as you put it, our trade balance because if we don’t, the 21st century equivalent of the USSR Gosplan (the Chinese, the Germans, the Mexicans) will manage the American trade balance for us instead.
As far as labor markets go, Ricardo himself says that tight labor markets produce happy, well-paid workers, and that slack labor markets produce miserable, immiserated workers. And even Henry Ford pointed out, there is no point in producing cars that his own workers can’t afford. I have worked in the oil patch off and on (with the emphasis on the off-and-on) since the early 1980s. That is to say, I’ve seen many booms & busts. Booms are way more fun than busts. Therefore, we should manage for booms…
Felix
Mar 10 2025 at 9:11pm
I hope this is not typical of the quality of your sources. Everything I have read says he got tired of training workers who then quit to work for competitors, and raised his wages to keep them from leaving.
If that quote were true, how do you explain Boeing workers building airliners they can’t afford to buy, or Gucci workers, or ship builders, or many many others?
Pierre Lemieux
Mar 11 2025 at 11:11am
Felix: Interesting comment. If the rumor as reported were true, anybody could launch perpetual motion: you create a company, hire enough workers to buy all your production–or just hire one employee but pay him enough to buy all he produces, including your profit–and you are all set for life. Or let a socialist (or otherwise collectivist) commune’s members buy everything the cooperative produces and redistribute its profits to all members equally.
The paradoxical example of the socialist commune reveals something else interesting. The trick could work on the level of a society because a society is the locus where individuals, firms, and associations exchange. But the only way to have a prosperous society is to let each individual free to sell and purchase from others what he wants and to decide with whom he will trade (including with members of other societies). A prosperous and free society is very different from Ford Motors: the freer it is internally, the more efficient.
David Seltzer
Mar 9 2025 at 4:24pm
Pierre: Good stuff. Another thought from the peanut gallery. US market cap is about 62.2 trillion. 128.2 trillion global. Current market prices are present value calculations of future streams of expected cash-flows discounted by some stochastic discount factor. (SDF). When tariffs were implemented, the market decline wiped out 1.24 trillion in US market capitalization. China’s Shanghai Index declined 3.8%. I suspect market’s real concern, going forward, is the uncertainty of DJT’s capricious policies affecting the US economy. One can hedge risks in markets, but Knightian uncertainty is virtually impossible to insure against.
Pierre Lemieux
Mar 9 2025 at 6:18pm
David: Good point. It is not easy to hedge the risks of clownish politics. It seems to me, however, that the probability of economic growth is in the lower tail of the distribution. I suppose that, if the political situation does not change, market expectations will move towards stagflation (if not worse).
Richard W Fulmer
Mar 9 2025 at 6:58pm
If a foreign company builds a factory in the United States in response to Trump’s tariffs, is that a net gain or a net loss? The new factory is what we see – jobs created, investment flowing in, and local economic activity. But what we don’t see is what we gave up to make it happen.
Pierre Lemieux
Mar 10 2025 at 11:14am
Richard: You are right, but what you say is a special case of a more general phenomenon: if tariffs increase the production of plastic toys, it means that resources (domestic and foreign) have been reallocated from the production of something else, say, egg crates. Who is going to determine the allocation of resources? The consumers or politicians (and bureaucrats)?
Ahmed Fares
Mar 9 2025 at 8:06pm
As regards replacing Canadian aluminum, you’re going to need some electricity.
Visualized: What Cutting Canadian Aluminum Would Cost the U.S.
Ahmed Fares
Mar 9 2025 at 8:18pm
Also, you’re going to need some transformers.
Gridlocked: Transformer Shortage Choking US Supply Chains
Pierre Lemieux
Mar 10 2025 at 11:29am
Ahmed: You write:
But “who is “you”? *I* have a demand (curve) for some electricity. How much depends on the price. I don’t “need” any transformer, and I let (or on a free market, I would let) suppliers take care of the transformers or copper or labor services that are inputs in their production.
This illustrates the general uselessness of the piece you quote, which ignores prices in favor of pre-economics incantations like “shortage.” Recall the reflection of the Russian official who, after the breakup of the Soviet Union, asked British economist Paul Seabright (quoted in Philip Coggan, More [The Economist, 2020], p. 357):
Felix
Mar 10 2025 at 9:14pm
At least Paris feeds itself.
Jose Pablo
Mar 9 2025 at 8:20pm
I’m a bit confused here.
If the trade deficit is only about 2.5% of U.S. GDP, doesn’t all the fuss and noise about bringing back industries and jobs amount to roughly one year’s worth of economic growth at most?
Is that really all it takes to “Make America Great Again”, just “onshoring” the equivalent of one year’s growth?
Craig
Mar 9 2025 at 11:23pm
“Moving and building a new plant, and quite certainly losing money on the sales of the old facilities (the owner does not literally move his plant across the border), is costly and takes time.”
And of course when one makes such an investment one is thinking in the long term……
“The uncertainty of ever-changing protectionist policies is another cost component. ”
Emphasizing uncertainty because that is the key, think about how, mathematically how the probability of future free cash flows might change in an NPV analysis.
What is taxation going to be? Well, that’s a major problem if you don’t know, how can one engage in any kind of long term decision making?
Pierre Simard
Mar 10 2025 at 10:15am
Governments frequently grant subsidies, sometimes substantial, to attract foreign companies to their territory. Don’t tariffs have a similar impact? It might be relevant to factor them into the equation.
4o
Pierre Lemieux
Mar 10 2025 at 11:40am
Pierre: Right. The impact of tariffs and subsidies on the allocation of resources are in many ways similar. The distribution of costs and benefits however is very different.
Michael
Mar 10 2025 at 11:22am
Much of a facility can indeed be shipped.
Pierre Lemieux
Mar 10 2025 at 11:37am
Michael: You are right, of course. The firm’s owner can move machines and inventories. (At the limit, he could move the factory brick by brick and plank by plank.) It depends on the cost of moving and, for machines, their age and their productivity compared to new ones. And note that the cost is an opportunity cost, which includes how much the facility components can be sold locally, if only for scrap.
Stephen
Mar 10 2025 at 6:45pm
As a Canadian living on the eastern Ontario border 10 minutes from the bridge to Ogdensburg NY, I am very sad about what is happening between Canada and USA. This trade war is not going to end well for any of us. We shop regularly on the USA side and are always greeted by very friendly store owners. I hate the fact that unfortunately our government is putting on reciprocal tariffs that is going to to affect the average American and not the upper USA government who makes these decisions of tariffs. Without our government not even doing anything on aluminum and steel tariffs, Trump is adding to the prices on the USA side: they will go up on everything. Good luck with that! Hopefully common sense and the stock market will rule the day and put this to rest sooner than later.
Stephen
Mar 10 2025 at 7:04pm
I really believe USA is going to Isolate itself from the rest of the world and it doesn’t help when President Trump appears to favour Russia over friendly allies. Trump saying USA does not need anything from Canada suggests he wants to destroy The Canadian economy and that will make it easier to take over Canada; for a powerful country like the USA to publicly say that is terrible and the world took notice. I am pretty sure the bulk of the Americans are ashamed.
Ira
Mar 11 2025 at 12:11pm
Look at total trade deficit with Canada- $55 to $65 billion. Take out $130 billion in oil and US has a $65 billion trade surplus, primarily in services. Cut back on oil by 50% and all is even. No need for tariffs between US and Canada. Oh, I forgot, the US needs the oil. Is this deficit a reason to destroy a 200 year relationship?
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