Tag Archives: economics

Tariffs and the Fed

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The Federal Reserve Bank is facing a conundrum:

First, they [tariffs] raise prices, which weakens the case for cutting interest rates. Second, they sap confidence and demand, which strengthens the case.

There’s this, too:

In May, the Treasury Department collected roughly $15 billion more in customs duties than in February. That is equal to about 3% of total consumer spending on goods. Some goods prices have risen, but not by that much. And in May, prices fell on some obvious tariff targets such as apparel and new cars.
This is a head scratcher. If consumers aren’t paying the tariffs, who is? Not foreign producers, at least through April, when import prices excluding fuel rose. Not, apparently, retailers and wholesalers, whose margins took a hit in April but bounced back in May, according to the producer price report released Thursday [12 June].

For me, though, the head scratcher is straightforward: it’s been so long since we had significant tariffs, and economies have evolved so much in that interim, that we don’t yet understand the lags that are involved between the onset of tariffs and allegedly associated price increases. This is further contaminated by the confusion by folks who should know better of highly variable tariff rhetoric with actual tariffs in place.

And a second contaminant: how much do tariffs raise prices, really, in a global economy that has supply chains that are much more mobile (or at least much less fixed in place) than in those prior economic environments?

And a third: a measure of flexibility in cost transfer techniques: keeping prices stable while doing away with free shipping or raising existing shipping charges, for instance.

Oh, and energy costs are down; lowering prices here counterbalances, in the larger scheme, price increases there.

Tariff Bankruptcy?

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Or is that just an excuse? Marelli, which supplies Nissan and Stellantis with auto parts like lighting and internal electronics, has filed for bankruptcy and is blaming the current tariff environment for the filing.

However, as Marelli’s CEO David Slump admitted in his company’s bankruptcy filing, as summarized by The Wall Street Journal,

…the company had already been struggling with long-term supply-chain issues stemming from the Covid-19 pandemic….

The company also has been struggling with losses and a hefty debt load for years.

Slump said the pandemic restricted access to both raw materials and the labor market, and set off a series of events that led to Marelli being unable to sustain its nearly $5 billion of debt. Even after the pandemic subsided, the impeded supply chain for semiconductors had an acute effect on automotive production.

Obvious questions arise:

  • what has the company been doing to reduce and then eliminate those losses over those years?
  • how assiduously has the company been working to pay down that debt? Has it only been paying the contractually obligated minimum payments, or has it been paying something extra against the principle in each payment period? Coupled with that, the company’s debt repayment has been heavily complicated by operating at a loss for years.
  • what has the company been doing to readjust its own supply chains? It saw, empirically, those five years ago during the supply chain disruptions of the Wuhan Virus situation, that its existing supply chains were heavily vulnerable.
  • what has the company been doing to develop new products and new buyers?

Slump’s claim of macroeconomic headwinds associated with the imposition of tariffs in countries around the world may well have been the trigger, but those “headwinds” are only that. This has been a bankruptcy building toward actuality for a few years. Excuse-making isn’t much in the way of a solution.

Ending a Market Distortion

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The Trump administration is moving to eliminate tax credits for buying battery cars. The Left and their news writers don’t like this.

The removal of the credit, created to incentivize US consumers to purchase electrified vehicles, would likely lead to a drop in EV sales and production.

NSS. The credit was created explicitly to “encourage” purchase of battery cars. On the other hand, Lauren Fix, a co-host of Talk 2 DIY Automotive, has this:

Getting rid of this $7,500 tax credit should not impact [Tesla] sales. People buy Teslas because they like the product…. They know what their customers want, and those that like Teslas will continue to purchase that product.

And [phrase substitutions in the original, emphasis added]

Once that tax credit goes away, I’m expecting [electric vehicles] to be about 2% of sales. There will still be electric vehicle sales, Tesla will still survive, and [Elon Musk] will do well. And other brands will make what consumers want.

There’re hints there. Get rid of government-created market distortions, and the market will produce economically viable products at far less cost without our tax dollars added in. That product mix will include plenty of battery cars as soon as they become technologically and economically viable—and are what us consumers want at prices we’re willing to pay without taxpayer handouts.

That May Be

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The Trump administration is moving to withdraw the visas for People’s Republic of China students at American colleges and universities. There is concern that the loss of these students at those schools would negatively impact the schools’ bottom lines.

A Trump administration announcement Wednesday that it would “aggressively” begin revoking visas for Chinese students confronts universities across the US with the prospect of a hit to their finances and talent pool.

There is, of course, a hue and cry from the press and their Party politicians. For instance, “US experts,” one of the many childhood imaginary friends so often consulted by news writers and opinionators, claim

A big decline in Chinese enrollment could severely cut into schools’ bottom line [sic] and damage US competitiveness[.]

And this: the People’s Republic of China “buys”—the news writer’s term—

education-related services, including spending on tuition and books, from the US, at $14.3 billion in 2023, 21% more than the $11.8 billion spent by students from India, and more than six times as much as students from South Korea, another major supplier of international students to the US.

That may be, but it isn’t relevant. Stipulate even that most of the PRC’s students here are entirely on the up and up. The question is not how much money the PRC spends on our schools, it’s the risk from the many who are here to spy directly, or are here to learn our technologies and our social techniques in order to take them back to the PRC to use against us.

The breadth and depth of that risk makes the group of them not worth the trouble to vet—an imperfect process at its best. The schools can adapt and adjust their budgets.

Not the Right Answer

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Nvdia’s honcho, Jensen Huang, thinks the administration’s export controls on chips is a failure. He claims all the controls have done is to galvanize[] Beijing to push ahead faster with its own artificial-intelligence technologies.

The local companies are very talented and very determined, and the export controls give them the spirit, energy and the government support to accelerate their development[.]

No doubt. That’s not the whole story, though. Forcing the PRC to spend its own resources on those developments rather than importing the latest and greatest, and then reverse engineering them, copying them, skipping development steps—freeloading off our expenditures—is good for us.

Aside from that, ever since the beginning of the Industrial Age, Western political, economic, and intellectual freedoms have powered Western innovation far ahead of anything dictatorships have been able to achieve, from Russia, the USSR, mainland China, pre-WWII Japan. That’s why they were at such pains to copy Western developments rather than developing their own. The copying was, for a long time, a major component of post-WWII Japan, too.

Rather than giving up on chip export control, we need to tighten them further to the point of cutting off chip exports to the PRC altogether, and we need to get Europe to do the same. There’s no reason to doubt the fundamental innovative superiority of the West so long as we preserve those political, economic, and intellectual freedoms and expand them by getting our governments out of the regulatory way. Free markets always will do better at enhancing our innovative prowess than centrally planned markets in the long run, and in the intermediate run, as well.