Marc Levinson

Tag: Manufacturing

  • The Government’s Tariff Bill

    U.S. tariffs supposedly generated a record $31 billion in revenue during the month of August. According to a breathless report from Fox News, “The US could collect as much tariff revenue in just four months to five months as it did over the entire previous year.” But while those numbers may prove accurate, they represent only one side of the federal government’s ledger. There’s hasn’t been much attention to the fact that with the tariffs Washington is effectively taxing itself.

    President Trump has set a tariff rate of 50% on steel, copper, and aluminum imports from most countries, excluding Great Britain. He has also imposed a 50% rate on the steel or aluminum content in 407 different products, from truck trailers to barbecue forks with wood handles. Those tariffs don’t just affect imports. By making foreign products more expensive, they make it easier for domestic producers to jack up prices; were that not the case, the tariffs would serve no purpose.

    And who buys that domestic metal? Much of it ends up in goods purchased by Uncle Sam (fighter planes, postal delivery trucks) or by state and local governments using federal as well as state money (girders for highway bridges, pipes for water systems). With the tariffs in effect, governments buy less with each dollar they spend on such things.

    Steep tariffs on pharmaceuticals are supposedly impending. The United States and the European Union have agreed that European drugs will face a 15% U.S. tariff, and Trump has threatened tariffs of up to 250% on drugs from other countries. Since the Washington pays 59% of the cost of outpatient prescription drugs and the states pay another 5% to 10%, governments will bear most of the burden of higher prices.

    These tariffs are not affected by the recent court decision blocking many of the tariffs Trump has proposed. They could remain in place indefinitely. And as long as they do, U.S. taxpayers will pay far more than they should for the goods their tax dollars buy.

  • Forgetting Friendshoring

    Remember friendshoring?

    Back in the days of COVID-19, when manufacturers and retailers suddenly paid attention to supply-chain risks they had previously ignored, the notion that they could reduce risk by “reshoring” manufacturing from abroad to U.S. locations came into vogue. The concept has some obvious limitations: it doesn’t eliminate the risks of relying on a single source of critical inputs or finished products, and costs make it impractical to produce many things domestically. “Nearshoring” was advanced as an alternative: perhaps some production could be moved from Asia to lower-wage U.S. neighbors. “Friendshoring” emerged during the Biden Administration — former Treasury Secretary Janet Yellen is often credited for coining the term — as another option, the idea being that national security risks could be controlled by sourcing sensitive goods from countries that are aligned with U.S. interests as well as from the United States.

    Since he took office on January 20, President Trump has taken or threatened unfriendly actions against some of those friends, including several countries — Panama, Colombia, Mexico, Canada — with which the United States has signed agreements to eliminate tariffs and other trade barriers. The announced tariffs on imports from China would also strike at many firms that draw on important inputs from China but are based in other friendly countries, such as Japan, South Korea, and Taiwan.

    The Trump Administration hasn’t had much to say about friendshoring, but its actions, whatever their other purposes, undermine the rationale for it. Companies that shift important links in their supply chains to “friendly” countries can no longer assume unfettered access to the U.S. market. That uncertainty may be enough to convince some firms to leave their Asia-based supply chains intact: If moving supplier locations doesn’t lower the firm’s costs or reduce the risk that trade barriers will interrupt its supply chains, why should it bother?

    The danger, of course, is that a decision that seems sensible for a firm may not be so sensible from a national security perspective. By being unfriendly toward friends, the United States may be increasing the very risks in critical supply chains that it has sought to minimize.

  • About That Manufacturing Renaissance

    The Biden Administration asserts there’s a “manufacturing renaissance” underway in the United States. Before it, the Trump administration claimed much the same. The federal government has certainly handed out a good deal of money to support manufacturing, in addition to aiding it with tariffs put in place by both Trump and Biden. But while manufacturing capacity, as measured by the Federal Reserve Board, has increased about 2.3 percent since Biden took office in 2021, labor productivity in manufacturing — basically, output per work hour — is down, according to figures released in early December. Total factor productivity, a measure of how industries improve technology and production processes to squeeze more output from a given quantity of inputs, fell in manufacturing in 2023 even as it rose in most other U.S. industries. These facts help explain why the Fed’s Industrial Production Index has been flat since the Obama years, save for a dip during the COVID-19 pandemic.

    How does this square with the boom in factory construction and the many newspaper articles about new factories reviving down-at-the-heels communities? What seems to be going on is less a manufacturing renaissance than a restructuring. According to the Census Bureau, the computer, electronic, and electrical manufacturing sector has accounted for well over half of manufacturers’ construction spending this year, and construction in the transportation equipment sector is also strong. Meanwhile, construction in other manufacturing sectors has barely grown or even declined after accounting for inflation.

    This is relevant to the much-discussed “reshoring” of manufacturing. To the extent that “reshoring” is underway, it seems to be concentrated in a handful of sectors, notably semiconductors, electric vehicle batteries, pharmaceuticals, and medical equipment. There are few signs of U.S.-made goods supplanting imports of industrial machinery, plastics and rubber products, synthetic fibers, paper, textiles, and any number of other products. Despite all the government support and the talk of tariffs, many manufacturers don’t seem to see the future in the United States.