The degeneration of US trade policy into a directionless tariff war must be one of the more extraordinary developments of modern times. The apparent rationale behind it all is the need to return lost manufacturing jobs to the US.
In US President Donald Trump’s view, the globalisation of trade and supply chains over the past few decades has come at great cost to the US. In a yearning to the manufacturing pedigree and capacity of yesteryear, the new administration aims to persuade companies that want to retain access to the lucrative US market to move much of their operations to the country.
While this sounds idealistic, its political attraction stems from the fact that global supply and production chains have evolved over time to be widespread across the world. In spreading the net of economic activity companies naturally chase the balance between low production costs and affordable logistics. Countries that meet these criteria become where manufacturing activities are located.
In these locations the intersection of comparatively lower wages and operational efficiencies yields low unit costs that enable products to reach the end user as cheaply as possible, while also maximising profits for the companies themselves. Countries such as the US, where wages are higher and regulatory and compliance costs are robustly monitored, struggle to match these low-cost jurisdictions. The shifting of jobs away from the US that has taken place has been for these reasons.
Naturally, such shifts create anxieties in communities where the effect is felt most acutely. It is these communities that Trump seeks to appeal to by selling the idea that his policy drive will force companies to return production facilities to the US and make America great again. The problem is how.
In an ideal scenario companies would voluntarily move production to the US on the basis of a collective range of considerations, including costs and ease of trade. If costs are regarded as burdensome, government incentives such as tax breaks can aid the decision-making.
The problem with offering tax breaks to companies that are already doing well, just to add a few jobs in the local economy, is that those who do not benefit from the shift — either because they cannot benefit from the new jobs or because the redirection of public resources comes at the expense of other priorities — are likely to see the whole exercise as an overpriced, wasteful initiative.
Seemingly aware of the complexities associated with tax breaks, Trump has instead opted for the punitive tariff approach, which essentially compels companies to deliberate on whether they can remain offshore and still sell to the US market with tariffs in place, or must yield to the mood of the administration and move their operations back to US soil.
The practicalities of moving operations vary from industry to industry, but few large companies can do so within months. Those that decide to move will have to work on the premise that the effects of the Trump administration’s actions will linger well beyond his term in office, so the cost of the move can be justified.
In the interim, the import tariff rates — which change randomly — will remain a persistent threat that only those with an inside track to Trump (such as Apple’s CEO) can manage on behalf of their companies. The problem with a model that depends on arbitrary benevolence premised on proximity is that it only works for those within the circle and will not — on its own — deliver on the Trump promise of restored greatness.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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