The underlying flaw with our trade policy is that it attempts to pick winners and losers. Steel? OK, protect it. Plastic gizmos or metal hinges? Sorry.
The purpose of tariffs is to protect American workers and their jobs. And what are we protecting them from? From becoming welfare recipients or reduced to Third World wages. For the first time in human history, it has become possible for a billion, 40 cent-per-hour people to enter a developed economy en masse. Some would have us do nothing in the name of so-called free trade, as if ignoring this unprecedented dynamic will cure the issue. It will. The Third World will marginally go up, and America will dramatically go down.
But if we protect some jobs and not others, all we've done is to create a complicated, politically leveraged, special-interest, unfair and unworkable mess. It's like squeezing different parts of a balloon: The real problem will continue as we chase the bulges.
For example, take steel tariffs. American metal-stamping companies complain that when their Chinese raw steel supplies incur a 30 percent tariff, their costs go up. That's because they're buying from China, but for that price, they might as well “Buy American.” Which is, ironically, what they want their customers to do, isn't it? But they don't like it because they can't pass the price increase to their customers. And why can't they enforce a price rise? Because they fear, and have witnessed, that their customers will buy their product from China for less. So they eat the increase and either slowly go bust or, en route to Third-World wages, pay their workers less and less.
It's a backfiring mess.
Let's do some math. Typically, raw material accounts for 30-50 percent of the total cost of an American-made product; use 40 percent as a fair average. Using a $1 metal or plastic hinge, 40 cents is material and 60 cents is labor and overhead. And if they make 3 cents in after-tax profit, they're lucky to be in the median. If a steel tariff causes a 30 percent cost increase in the material content alone, the American manufacturer's cost goes up 12 percent, to $1.12.
So if a Chinese manufacturer will sell a finished hinge for at least 40 percent less — 67 cents — off go the customers! But if there is an across-the-board, 30 percent tariff on all Chinese imports, the Chinese price becomes 87 cents. It's now only a 22 percent advantage. But for all the hassles involved in importing, shipping, inventory control and timing, the customer may decide 22 percent isn't worth it. But for 40 percent, what would you do?
Our working folks cannot, and should not, compete with the Third World's billions. They should compete here. Which is why the union-suggested, no-fire proposals are counterproductive to constructive competition. And there's plenty of it here. But if we force our workers against impossible Chinese wages, we shall upset the whole domestic economic and social balance that it has taken America hundreds of years to create. We have to realize that the Third World labor onslaught is historically unprecedented. The old free-trade economic lessons don't apply. Tariffs can work. But not done piecemeal.
Stan D. Donnelly
Donnelly Custom Manufacturing Co.
St. Paul, Minn.
