Tariffs: Wall Street versus Main Street

 

There's a significant amount of noise-versus-signal debate over President Trump's new tariffs.  I thought I'd offer a simple explanation, that glosses over many of the finer details but clarifies the essence of the problem.

Basically, tariffs benefit those who produce locally.  Goods made in America are not subject to tariffs, and the components and elements used in their manufacture are not subject to tariffs if they're also locally produced.  Imported components and elements are subject to tariffs, but since they're typically a fraction of the cost of the finished article, the tariffs don't add too much to the cost of the article.

Tariffs do not benefit - indeed, they indirectly attack - those who want to "export" manufacturing and production to cheaper environments offshore.  The primary reason so many jobs were lost in the USA over the past few decades is not just technological advancement:  it's also that wages and associated costs overseas were a small fraction of US levels.  (That's no longer as true as it was, because overseas wages and costs have increased dramatically:  they're still usually lower than ours, but not by nearly as much as they were.)

Thus, the rise of "globalism" was, in fact, a push to send expensive manufacturing overseas rather than keep it here.  Why?  Because companies could make much more money by producing their products at a low cost, importing them at minimal or no tariffs, and then selling them for as much as they'd charge for US-made products.  Alternatively, they could make their low-cost products and sell them more cheaply than their US-based competitors, thus cornering the market and driving the others out of business.

The focus on manufacturing turned into a focus on financialization.  The manipulation of money became more important to many businesses than the goods they produced, and the place the latter were made became less important than the cost of making them.  Thus, local jobs were greatly reduced because they were too expensive compared to workers overseas - and companies didn't care about the social and cultural costs involved.  They cared more about the "broad picture" of making money overall.  (To illustrate, ask yourselves why the big auto manufacturers all developed in-house financial operations like Chrysler Capital, Ford Credit or GM Financial.  They did so purely and simply because there was more money - and more profit - to be made by financing auto sales than there was in simply selling cars;  and they wanted to keep that profit in-house rather than lose it to banks and other loan providers.  The profit from those financial operations rivals - in some cases, exceeds - the profit from making the vehicles.)

Thus, companies that financialized their operations became hits on Wall Street.  The more money they made, and the lower their costs could be driven, the better their stock price became as investor money (seeking, as always, the best return) poured into them.  The fact that executives at such companies often received a large part of their compensation in the form of stock offers, or bonuses for stock performance, had a lot to do with that.  Executives were now effectively working for remote investors, people with no interest at all in what the company made but every interest in exploiting its profits.  Thus, Wall Street became richer and richer, while Main Street (where the goods were actually made and sold, and where jobs depended on that process) became poorer and poorer.  That's why we have millions upon millions of people unemployed or underemployed in this country - and why those people have become a burden on the federal government through entitlement programs like welfare, Social Security disability, food stamps, etc.

Tariffs threaten to reverse that process.  They make it much more expensive for companies to manufacture their products in other countries and import them.  It becomes cheaper and more advantageous to make them here, and hire locals to do the work.  However, that's also a threat to countries like China and Vietnam, whose entire economic success has been built upon becoming low-cost manufacturers for the rest of the world.  Those companies look upon President Trump's tariffs as a direct and immediate threat to their own economic well-being, and they're right.

This is also a threat to the other developed economies of the world.  Not only are their exports to America now going to cost US consumers more (and therefore sales of imported goods may be expected to decline), but they're now going to experience a flood of imports from countries that previously exported a lot to the USA, but must now find new markets for their products - or watch their own economies decline.  The entire global order of making goods cheaply for export to other nations hangs in the balance.

Yes, the tariffs are going to cause economic problems for a while (although not, I think, as severe as some pundits are claiming).  However, they're also likely to succeed in revitalizing US manufacturing and production.  For example, just yesterday I heard of someone complaining on social media that in Maine, long-mothballed paper plants were being reactivated, because it was going to be too expensive to import lower-cost paper products from Canada thanks to the new tariffs.  Other shuttered paper mills are being converted to manufacture other wood products.  That's exactly what the tariffs are designed to accomplish!  Those reopened plants will offer jobs to local employees, and a boost to local economies where their wages will be spent.  It will also reduce those employees' dependence on public assistance, and reduce that burden on taxpayers.

In a nutshell, that's what tariffs are designed to achieve:  and that's also why Wall Street, and those who've made fortunes from financialization, and the news media that are themselves the product of financialization in that they're owned by the oligarchs who made fortunes from it, are all bitching about them and forecasting doom, gloom and destruction.  It's simply Wall Street versus Main Street.  For decades, Wall Street has lorded it over Main Street, to the former's enrichment and the latter's impoverishment.  Now that tide appears to be turning - and Wall Street hates it.

I'm willing to give President Trump a chance, and his tariffs time to show whether or not they'll accomplish what he intends.  It's going to be a bumpy ride, but the scenery should be fascinating!

Peter