Forty years ago, I was working for Bob Crandall as an RA at Brookings, on how much the voluntary export restraints (VERs) added to the costs of a typical Japanese imported car. He found that number to be about $820 (a Datsun Stanza was about $6700 in 1981), and a comparable domestically produced car by about $370 (since the VER puts up a wall that allows domestic producers to raise prices). Today, according to Wells Fargo, the 25% tariffs would result in a vehicle assembled in Mexico or Canada to go up in price by $8000-$10000, while the average over all cars using imported parts will go up about $2100 (average car price in March 2024 is about $47000; a Ford F150 STX is about $42000).
Now, Trump is talking about tariffs. But an effective VER is like a quota (although the rent is transferred to the Japanese rather than US importers), and a quota (in a certainty world) is like a tariff. So no wonder this would be a terribly anti-competitive, anti-consumer policy.
As a policy analyst, this is a horrible, counter-productive, policy. As a social scientist, I am curious as to how this plays out, in terms of price impacts, automobile purchases, and unemployment effects (the article cites $5-$9 bn risk to US headquartered auto companies).
I am also interested in the distributional effects. To the extent light trucks will be particularly affected, and those vehicles are more heavily used in rural areas, expect the cost impacts to be particularly pronounced in those areas.
For more on the VERs and hedonic adjustments, see Feenstra (1984).
I want my cheap Chinese EV but am unlikely to get it. Elon Musk will make sure that Trump never allows it.
Meanwhile Musk is pushing Trump to eliminate subsidies for EVs. Now that Musk has financed his factory capital investments with billions in corporate welfare, he no longer needs the subsidies and he wants to cut the legs out from under any potential domestic competitors getting started.
Musk is profiting on his $120 million investment in Trump’s election. It’s all about corruption.
Out NAFTA* buddies are getting busy:
Sheinbaum spoke with Trump on the phone, and he now claims she has agreed to close the border. Right… Anyhow, both say the call went well; it’s what you say.
https://www.politico.com/live-updates/2024/11/27/congress/trump-and-mexico-00192016
Trudeau, meanwhile, is hoping to erase his deficit in the polls by claiming he’s Canada’s best defense against Trump’s antics.
https://www.politico.com/news/2024/11/28/trump-trudeau-moment-00192023
* I realize there has been a rebranding of NAFTA, but it’s still just NAFTA – a marketing gimmick but no substantive difference.
Tariffs or no tariffs, the rise of BYD seems inevitable. I think that Japan and Germany will face more adaptive pressures than some of our domestic auto makers because of their slow transition away from combustion engines. The global battle for dominance seems to transcend countries—it’s all about who can build the best and cheapest electric drive trains. A tariff could help BYD because they can work through design and production problems with their domestic market before deciding which cars to assemble and market in other countries.
What the hell do I know? I’m just regurgitating David Halberstam on this.
David S, the irony of Germany being unable to compete with China on EVs is hilarious given Germany’s commitment to “clean” power.
https://asiatimes.com/2024/11/germany-closing-factories-at-home-opening-them-in-china/
Ideology doesn’t build competitiveness.
Off topic – Bond vigilantes ride again? A paper from August of this year uses event studies to claim that Treasury market investors have become more sensitive to fiscal shocks in the Covid era.:
https://siepr.stanford.edu/publications/working-paper/government-debt-mature-economies-safe-or-risky
The point made in this study is that investors may be seeing greater risk from fiscal policy in the Covid era than they did prior to Covid.
The authors’ approach relies on a stylized view of policy “dominance” from 1991. The authors argue that the yield spike in March of 2020 is a better fit with “fiscal dominance”, as opposed to “monetary dominance” – future tax policy does not respond to fiscal shocks, so monetary policy must. In other words, investors see an increased risk to their interests rather than to tax-payer interests as deficits rise.
Well, maybe. We can measure market participants’ assessment of risks by decomposing interest rates. Here’s the 5-year/5-year inflation rate, ten-year term premium and ten-year Treasury yield:
https://fred.stlouisfed.org/graph/?g=1BOzu
At the time of the March 2020 yield spike, inflation expectations fell and term premium rose. FRED doesn’t provide a way that I know of to represent anticipated funding costs, but it’s reasonable that if fiscal policy had become more stimulative, future monetary policy would need to be less stimulative. Anyhow, the drop in inflation expectations is not consistent with the authors’ claim that the March 2020 yield spike represents a regime change in which investors see their interests at greater risk. I will admit, though, that the measures drop in inflation expectations Isa bit counter-intuitive.
The problem with basing analysis on a narrow event, both for the authors of the study and for me, is that market activity is not fully transparent. Liquidity issues, trading programs and the like can make a joke of our nice theories for any single event. The authors do not mean for that one event to carry the full burden of their analysis, but that one event is the story they offer which I can examine. They identify 79 days on which fiscal news was available and find that market reaction to such news increased during the Covid period. I don’t have access to those events.
I’d like the authors to square their assessment with priced-in inflation expectations, but much more important than my puny druthers is the possibility that investors really have become more sensitive to deficits. Dick Cheney’s “deficits don’t matter” was egotistical claptrap when he first said it, but then the decades-long bond rally still had some life in it. If the bond vigilantes really have saddled up again, reckless fiscal policy and numbskull management at Treasury could be a serious problem. After the clubbing Treasury investors suffered during the Fed’s Covid tihtening, increased sensitivity to any risk in Treasuries is a natural response.
Don’t think of tariffs on Chinese goods as taxes on Americans; view them as a very Progressive means of dissuading the American publics from purchasing goods made with exploited labor and environment.
https://apnews.com/article/temu-shein-forced-labor-china-de7b5398c76fda58404abc6ec5684972
Yes, Joseph, there is an economic desire to purchase those cheap cars made in China, but…
https://www.hrw.org/report/2024/02/01/asleep-wheel/car-companies-complicity-forced-labor-china
And the economic benefits of buying inexpensive Chinese-made fashions for women are certainly undeniable.
https://www.bbc.com/news/business-59245708
So, what are a few deaths because there is no effective Chinese EPA equivalent if we can get all of that stuff so inexpensively?
https://earth.org/environmental-issues-in-china/
We can feel morally superior that we are not exploiting labor or killing people by poisoning the air, so just ignore the issues behind the curtain because… economics!!!
Oh, and that nagging feeling? https://www.fdd.org/analysis/2024/01/17/examining-the-flow-of-u-s-money-into-chinas-military-might/
Of course, that’s just silly, isn’t it? We hope….
But maybe those taxes on imports from China, while economically inconvenient, are not as one-sided negative as the economics-only perspective would suggest.
Bruce Hall: I’m in favor of sanctioning companies that profit off of forced labor in Xinjiang (have written on the topic three times on Econbrowser). However, I’m also in favor of *effective* sanctions, not sanctions to extort favors financial and otherwise from other countries or other countries’ leaders (remember how Trump folded on ZTE?).