Comment by yibg
8 days ago
The bring manufacturing back to the US never made sense to be numbers wise.
Thing A is currently manufactured in China | Vietnam | whatever lower cost country and sold for $x today. Slap on 50% tariffs so now it costs $1.5x. That provides an incentive to produce thing A locally sure.
But if you can already produce thing A locally for $x, you wouldn't have offshored the production in the first place. Maybe producing thing A locally will cost less than $1.5x, but it'll still be more than $x. So cost still end up increasing.
Am I missing something?
The missing piece is not all costs are passed on to consumers.
Company absorb costs all the time. If you think cutting your price by 10% will boost sales by 20%, you do it because total profit is higher even though per unit profit is lower.
And the reverse is true - companies might increase prices and accept lower volume.
Not to mention not all items are interchangeable. Is a car made in Mexico worth the same as the same model made in Germany?
Low cost items, of the type the vast majority of the population are quite sensitive to the price of, have almost no margin on them to start with. There isn't 10% to cut.
True, but a $5 trash can with a 10% tariff is $5.50
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So basically a lose lose from company and consumer perspectives. Either company makes less profit or consumers pay more or a mix of both.
Congratulations you have just re-discovered an Econ 101 concept called deadweight loss
The Q5 is made in Mexico.
I think the long game answer is clear: Trump wants an old fashioned World War with China before 2027 and needs production back in the States.
Yes, this is the puzzle piece many are missing.
They see a way with china by the end of the decade so they are trying to remove dependence on their manufacturing and flip Russia to our side.
Except there isn’t any guarantee of a war with china, it’s just an idea they have. For all we can tell they have no intention of that. Taiwan is tricky though
Whether one umbrella factory moves from China to the US within this election cycle doesn't really make a dent. The moving of industry from the US happened over decades, and was hand-in-hand with the US making fewer umbrellas and more computer programs, satellites, and microchips. Moving basic manufacturing of low value goods to the US would cannibalize the capacity of producing higher value goods. And none of it will be noticeable while Trump is still alive.
Hard to say re: labor cannibalization - if you are sociopathic about the labor force like Trump is, all these fentanyl deaths are just spare capacity that didn’t have an input interface and should have been in a factory.
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Two typical scenarios that we know from the past in industries like cars for example.
Corp one has two factories one smaller one in the us one bigger one in the eu. They will now shift more of the production to the us from eu to avoid tariffs.
Corp two only has a factory in the eu. They will now build another factory in the us to be able to avoid tariffs and keep selling their goods at competitive prices.
Forgive me my ignorance, but: parts from which cars are assembled (or raw materials from which parts are manufactured), are also subject to tariffs, aren't they? So the only shift that would happen is that of the labour (and US labour is not the cheapest, IIRC).
They would in the current scenario, yes, but the OP said “Two typical scenarios that we know from the past in industries like cars for example”
In the past, countries would put tariffs on importing cars, but not on importing car parts (with some complex definition of what constitutes a car and a car part. IIRC, there once was a loophole where one imported a car and converted it into a van by removing back seats to avoid a tax on importing vans)
For manufacturing physical goods, labour cost is a small percentage of the total cost of the good. Why is this? Because modern labourers are extremely productive: they are highly skilled at their jobs and use very efficient tools and machines to do their jobs.
No those factories will shift too its a domino effect.
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> They will now build another factory in the us to be able to avoid tariffs and keep selling their goods at competitive prices
They won't be competitive prices though; they'll have to charge more because of the capital costs in setting up a whole new factory and supply chains, increased labour costs, and having to pay tariffs on importing parts.
I imagine that not being able to export cars from this factory due to reciprocal tarrifs will also drive up prices, due to things like lost flexibility, redundancy, and economies of scale.
And it isn't like we have especially high unemployment right now. There isn't a labor force available to suddenly staff a bunch of factories even if they took zero time and capital to set up.
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If corp two could have factories in the US and still sell them at competitive prices they would've done that already no? The fact that they haven't indicates it didn't make economic sense. So then doing so would mean their costs would go up, which would either mean they have to eat the extra cost and reduce profit or pass the extra cost to consumers.
They can only pass the extra costs if there is no competition and they can only eat the costs if their margin is big enough to absorb the cost and still remain profitable. If their us market share is important they will shift their production around to the us or somewhere that has a favorable trade agreement with the us.
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In the first scenario the investment isn't astronomical, and if there is surplus capacity you can definitely shift around to avoid tariffs. I think Volvo already announced this wrt. to their US plants. They can take some production from the EU or China and use capacity in the US to build cars. The parts are still imported from China and the EU so will be more expensive, but they still seem to think this can help.
But the second scenario is a massive investment. It not only requires the economics of it to work today, it requires knowing what the situation is 1 or 2 decades down the line. You can't build a car factory in two years. Barely in four. And even if you do, it doesn't matter if it's likely to operate at a loss in 8 years!
The most important thing for that type of investment is stability and predictability, not just "the costs will be lower for at least 2 years now! or maybe 2weeks we don't know since the tariffs seem to come and go depending on which side of bed the local czar wakes up on".
No corporation is building a factory based on a policy that has a lifetime of four years.
3-4 years is a LONG time in business. I do not know how long the tariffs will last. Maybe they will come to a deal next week maybe not. but if they stick around businesses will move stuff to the us. I'm saying this as an EU citizen.
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You just made me think of another scenario, Corp three has mostly idle factories at important locations around the world but designs their factory lines to be packable and shippable around the world to hedge against tariffs. The carrying-cost of buildings is considered insurance.
That’s may be true. But why does Vietnam have such high tariffs? They should be competitive based on their lower costs right? So it’s simple: Vietnam can eliminate tariffs on imports and the U.S. would eliminate tariffs as well.
the tariff is calculated based on trade deficit, not how much tariff the other is applying