As I have said before, the Trump-Sanders Wall against Trade was already tried once, so we actually know what it would really do. Franklin Delano Roosevelt passed the Smoot-Hawley Act, which imposed big tariffs on imports. In the middle of a depression so terrible it could not get worse, Smoot-Hawley succeeded in making it worse. So folks who pay attention to history don't really need an example of why such tariffs are a disaster, they already know. But let us proceed as if the Wall were a novel idea, untried and untested, and the only reason to suspect it would be a disaster is that it violates the laws of economics. After all, we tend not to believe the laws of economics anyway, not even as they strangle us in our sleep when we violate them.
How could the Wall possibly go wrong? How could forcing us to manufacture all our own stuff possibly lead to fewer jobs? Let's take a look at what would really happen with Ford if Trump or Sanders put up the Wall.
First, why is Ford moving their small car manufacturing in the first place? Understand what damage such a move does to a company's bottom line. It is fabulously expensive to move a factory. It is not something you do to squeeze another one percent profit out of the system, it would never pay for itself. Moving a factory is an act of desperation.
Ford has to move the factory because they cannot make a small car in the USA that is cost competitive. It turns out that the small car market is very sensitive to price, the competition is fierce, and the margins are really thin. All the other car manufacturers are able to make cars less expensively, and they are killing Ford with lower costs. To compete, Ford would have to lower the price to the point where they lost money on every car sold.
So it doesn't make any difference what kind of tariff Donald or Bernie puts on imported cars. Ford simply cannot produce small cars here. So if they cannot import small cars, they simply cannot offer small cars in the USA.
It is perhaps worth answering the question of why Ford cannot make a competitive small car. I am not certain, but there is a fairly obvious explanation. Back at the beginning of the Great Recession, General Motors went bankrupt, and we learned that the labor union contracts agreed to by Ford and GM added an additional $5000 cost when compared to cars manufactured using non-union American employees (yes, Toyota, Honda, etc., have plants here employing thousands of Americans). Part of the restructuring of GM during its bankruptcy was breaking all its contracts and requiring the unions to accept new deals that were competitive. So GM and the foreign car companies with American plants came out of the Recession with comparably low costs of manufacture.
Ford was both lucky and unlucky. They were in better shape than GM, and were able to slog through the Recession without bankruptcy or restructuring. They got some concessions from the unions during the crisis, but their costs remained too high. Now, for large vehicles with larger profit margins, Ford is able to absorb the labor costs. But for the thin-margin small car market, it is just too much.
So, what are the real consequences of the Trump-Sanders Wall? Ford would still shut down operations in Detroit and put a small car factory in Mexico. But they'd only be able to sell the cars in other countries. So they'd make fewer cars, hire fewer workers, and so fewer Mexicans would have jobs that allowed them to buy other goods, from iPhones to Ford's own cars, that are wholly or partly made in America. Those companies would sell less, and hire fewer Americans. But that is only the beginning of the downside of the Wall. The real disaster is more lush and ironic than that.
Understand that the Ford F-Series truck is the largest selling vehicle in the world. Yes, it's the biggest seller in the world today. But it would not be the biggest seller any more after the other countries responded to our Trade Wall by putting up their own Trade Walls against the USA. Ford's trucks would no longer be imported to other countries. So Ford would have to shut down much truck manufacturing capacity, and lay off workers in droves.
And down the spiral to the next Great Recession we would go.
But what about the poor workers who will lose their jobs making small cars in Detroit? First remember that they would lose those jobs anyway. Forget about Mexico. They simply cannot make a cost-competitive small car regardless. But as it happens, in this case those Ford workers are going to be just fine. Ford is going to move them into new factories that make high-end vehicles that have larger margins.
So the next time Trump talks about how the Wall will make America great again, just tell him what he tells us: "Wrong, wrong, wrong".
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