Home > Uncategorized > In US’s Consumption Economy, Tariffs are just pointless Government Accounting Tricks

In US’s Consumption Economy, Tariffs are just pointless Government Accounting Tricks

First, a simple case of fact of what happens to a massive tariff against Chinese made products.

In 2011, US imposed a massive tariff against Chinese made solar panels and cells.  In 2013, EU followed with a 50% tariff against Chinese made solar panels and cells.  In order to “keep US and EU solar companies competitive against unfair dumping”.

Now, 3-6 years after that, the tariffs are still in place, but nothing else changed much.  Chinese solar companies grew in market share.  No US or EU solar company booms.  Solar panels and cells prices continued to drop.  (Solar module prices dropped from about $0.70 per watt 2013 to about $0.55 per watt 2016).

There is no teeth in the tariffs, when big international companies are involved.  (They simply hire lawyers to get around the tariffs, or they find a way to make the consumers pay for it).

This is the same for iPhones and cars.

President-Elect Donald Trump and his unabashedly anti-China economic adviser Peter Navarro proposed a 45% tariff on all Chinese made products imported into US.  (and even urged Apple CEO Tim Cook to “build a big plant” in US).

On the second urging, a point of fact:  Apple isn’t in the business of building factories.  Apple doesn’t even own those factories in China.  Apple “subcontracts” assembly work to Foxconn and Pegatron (both Taiwanese owned companies in China).

Apple has asked Foxconn and Pegatron to “investigate” the possibility of building factories in US.  (YES, that’s 2 FOREIGN companies building factories in US, with jobs that Apple never had in US).  Foxconn has said “we will get back to you”, and Pegatron has flatly refused.  https://9to5mac.com/2016/11/17/report-apple-asked-foxconn-and-pegatron-to-investigate-manufacturing-iphones-in-the-united-states-as-donald-trump-import-policy-overhangs/

Setting aside the idea of Trump forcing a US company to haplessly BEG a foreign company to create jobs in US, whatif the 45% tariff is slapped on the future iPhones made in China??

Well, much like what happened in the solar panel market, NOT MUCH.

First, a side note:  Did you know that iPhone raw price (before tax) in US is about $80 cheaper than the same in Europe and Asia??  (and yes, that’s with all taxes and tariffs taken out).

Do you know why??  (It would seem strange to people that an iPhone made in China would cost more in China)

It’s because US government (in a round about way) subsidizes iPhone sales:

(1) Wireless services like AT&T actually pays Apple a “kickback” for every iPhone sold through AT&T service, estimated about $200 per iPhone.

(2) AT&T gets a tax deduction from US government (for things that AT&T would do any ways, like installing network cables, which it usually charges the consumers for.  2011 alone, AT&T got a tax reduction of $420 million).

In the end of that circle of money, US consumers end up pay for iPhone basically at probably higher price than normal, because the tax reduction to AT&T gets passed onto the consumer taxpayers any ways.

  • So what happens when the iPhone 8 gets slapped with a 45% tariff, and its price gets to about $1,200 per phone?  Nothing.

Apple sells the iPhone through AT&T, and AT&T puts it on a lower price in its stores (which Apple will emulate in Apple stores), then AT&T gets a bigger tax refund from Donald Trump by the virtue of AT&T corporate attorneys.  (AKA giant circle of money in accounting books).

In all that, AT&T will probably raise its data plan fees, just like before.

Why would Apple and AT&T do all of that??!  To protect China??!!

Nope, because Donald Trump and Peter Navarro fundamentally forgot, US is a Consumption driven economy.

Since the 1970’s, US shifted from a production economy toward a Consumption economy.  Here is a discussion about that (though I’m not sure I agree with all its conclusions):  https://innovationandgrowth.wordpress.com/2011/08/10/production-economy-vs-consumption-economy/

The Consumption economy also means the possible worst scenario of a Democracy:  “Bread and Circuses”, where the government incentivize and give the People food and entertainment as a way to survive.

The Consumption economy also means that US companies are beholden to the investor and the public to DRIVE the public to continue to “consume”, even beyond rational ability to pay and sustain the consumption.

If the Public can’t pay?  Put it on installments, tax credit, loans, mortgages, debts, etc..  Anything to get that sales number up.

How do you think the housing bubble happened?  Or the Big Short?

China doesn’t have to worry about the tariffs, because some American sales VP will figure out how to make US consumers pay for it in sub-prime loans.

Afterall, that’s what the stockholders care about too.  So why would Apple risk building its own factories in US??

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  1. pug_ster
    January 4th, 2017 at 12:30 | #1

    I somewhat agree with you on this. Don’t agree with you on the phone thing. It is utterly stupid in bringing back manufacturing to the states will actually help them. Most of the items coming from China are coming in the .99 store where it will cost more to the American consumer if it comes back to the US. I guess that many things large items that is cost prohibitive to ship will probably come back to the US. But

    Trump hired Robert Lighthizer in the US Trade Representative Office which supposingly helped with the trade situation in the 80’s with Japan, but there is nothing that can be done already. US has a 500% tariff towards Chinese Steel and China is already going to close down several state owned Steel factories. It is not like Chinese cars coming to the US unlike Japanese cars. I can say good luck putting tariffs on Chinese made phones, because it will probably come from somewhere else like India.

  2. January 5th, 2017 at 05:06 | #2

    Any tariff on import is simply a tax on the consumers. The biggest problem with Trump’s new economic team is that they tend to focus on bilateral trade relationship between China and US. However, they are so blinded by the “China threat” that they pretend the rest of the world doesn’t exist. One must remember that any accusation goes both ways. Should China start accusing the US of stealing jobs from China? And start taxing Boeing, GM, MacDonald, Intel, AMD, Hollywood products or simply any products/service from US companies?

    The US trade team seems to be ignoring the elephant in the room, the US consumers. One should look at US trade deficit as over consumption. The lack of saving of the average Joe should be a big alarm bell. However, nobody wants to tackle this unpopular subject. And seems illegals also got the blame for taking jobs from American, I don’t think I can expect more from this administration.

    I predict big friction in the beginning but things would level out eventually like all previous conflicts between China and the US. By leveraging China’s advantage in certain manufacturing industries, US MNCs have been making the lion’s share of the profit on China’s export. For every dollar China’s companies are making, US companies make several times that. There are simply no countries offering this type of opportunities for US companies. If the condition existed, not only US MNCs would be there but the rest of the world would follow already. Nobody is running any charity in international trade.

    And why would any genius be interested in $3-5/hour job? Even China is losing those to lower wage countries. What about $20+/hour job that the other 20 plus countries which are having surplus of trade with the US? Is Trump’s trade team planning to go after them? If not, they are ignoring the gorilla in the room.

  3. ali saw
    January 6th, 2017 at 21:17 | #3

    Defying the logic of economic is suicidal especially hitting out at foreign products to protect its own.
    Common understanding is that when there is a ‘trade war’ between merchants, the customers will enjoy the most of it.. Why?, because the cost would be much cheaper than before.
    In Trump’s case is the reverse.
    Americans all these while have been enjoying cheap imported products, thus allowing them to have extra income for other purposes.
    Slapping high tariff would only hurt the pockets of the people while protecting the entrepreneurs.
    Inflation will creep in and standard of living will go down.
    Don’t forget America also has to depend on trades to survive.
    Other countries would follow suit to do the same.
    The net loser would be US because there are many other sources countries could tap into for trades.
    According to IMF, China accounts for 30% of world growth.
    Trump would be punching his own body because out of that 30% alot of it is made up of foreign investments eg: iphone,shoes,electronics etc..
    To put blame on trade deficit, high unemployment, currency manipulation etc, without looking at the root cause is a self-defeating injury to the nation.
    US should be looking at its monetary system, the difference between balance of trade and how to work based on the ‘gold standard’ versus a ‘paper standard’, prudent fiscal control plus allowing more controlled high-end products to be exported especially to China etc etc…
    Another major factor which affects US financial health are national security and wars!.
    Looks like it will continue to go up.
    If US doesn’t adjust its position, I view it as twilight days for US on the long run.

  4. January 11th, 2017 at 08:01 | #4

    @ali saw
    Good analysis.

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