By Noah Rothman
Friday, March 28, 2025
To hear Donald Trump’s senior counselor for trade and
manufacturing, Peter Navarro, tell it, the president’s proposal for a 25
percent tariff
on imported cars and auto parts will do everything and nothing all at once.
The tariffs will yield a bounty of at least $100 billion
in revenue to the U.S. Treasury, which will be paid not by domestic consumers
but foreign producers. American automakers and repair shops will “eat” whatever
additional costs are imposed on them, which, we should remember, amount to
nothing. In addition, Congress will pass a retroactive tax cut to cover the
zero additional costs that consumers will incur as a result of these tariffs.
And none of this will contribute to inflation. It makes sense if you don’t
think about it.
Meanwhile, in the reality the rest of us inhabit, the
Trump administration is attempting to forestall the inexorable consequences of
the president’s artificial trade barriers and the unnecessary economic
disruption that will accompany them.
“When President Trump convened CEOs of some of the
country’s top automakers for a call earlier this month, he issued a warning:
They better not raise car prices because of tariffs,” the Wall Street Journal reported. The president himself
reportedly left carmakers “rattled and worried they would face punishment if
they increased prices,” but all that muscle has not repealed the laws of supply
and demand.
“Tariffs, at any level, cannot be offset or absorbed,”
one auto parts supplier mourned. “It is difficult to see how imposed tariffs
over time would not have some impact on prices,” Matt Blunt, the president of
the trade group that represents the largest U.S. automakers, confessed. “The
math would tell you, that’s going to cost us multibillions of dollars,” an
exasperated automotive executive lamented. “So, who pays for that?” Who,
indeed?
Their frustration is understandable. Tariffs do one
thing: increase the price of goods. Honest proponents of trade barriers concede
as much. Sometimes, their rationale is understandable if not entirely
compelling. If a country is being flooded with below-market goods from a
competing country to bankrupt a domestic industry, for example, or — more
parochially — some favored constituency is being muscled out of the global
market by virtue of its own inefficiencies or inability to compete, appealing
to tariffs makes some sense. But trade protectionism makes no sense if your
objective is keeping consumer prices for targeted goods low in the near term.
The administration’s hostility to prices is akin to a
meteorologist artificially adjusting observed air pressure because he doesn’t
want it to rain. Prices are only signals, but they convey a universe of
information to the consumers. What is the current demand for a product? What
are the costs of the industrial inputs that go into making that product? What
is the price and availability of the labor used to make that product? What
incentives are compelling producers to generate and market that product? That little
barcode conveys all this information and more. Governments can intervene in
that process and distort the signals that producers and consumers alike intuit
from prices, but that leads to undesirable second-order effects we should all
hope to avoid.
Some historically literate observers have concluded that,
if the administration followed its own logic, it would soon begin to flirt with
something approximating price controls. Prudence dictates that we not rule out
that prospect despite America’s unenviable experience with fixing prices, if
only because posterity’s lessons appear lost on the Trump administration’s top
economic minds.
When Richard Nixon implemented price and wage controls in
1971, the circumstances that compelled him to do so were far more dire than
they are today. Inflation was rising steadily, as was unemployment. The
nation’s far more robust but equally avaricious labor unions and the corporate
entities that catered to them were driving up wages and, thus, consumer costs.
The dollar was facing serious pressure from abroad as foreign debt holders
sought to redeem their American currency holdings for gold. Voters were feeling
the pressure, and they welcomed a 90-day freeze (which was later extended,
dropped, and reimposed again over the course of Nixon’s presidency) on price
and wage hikes — at least, initially.
The experiment proved a costly failure. Inflation was not
“whipped,” and unemployment continued to rise. By 1973, the economic
disruptions that accompanied price controls produced behaviors that were
simultaneously inexplicably illogical but also entirely rational. In their
masterly book, The Commanding Heights: The Battle for the World Economy,
Daniel Yergin and Joseph Stanislaw detail the unanticipated costs of
artificially low prices: “Ranchers stopped shipping their cattle to the market,
farmers drowned their chickens, and consumers emptied the shelves of
supermarkets,” the authors wrote.
The result of Trump’s leverage on automakers probably
won’t be as dramatic as that. Still, if the White House attempts to force
carmakers to swallow the new cost of utilizing the North American supply chain
— which, especially for cars, is now so thoroughly integrated that total
automotive autarky is hard to envision — the pain automakers are willing to
absorb would still not shield consumers from the effects of price distortions.
Consumers would experience shortages, fewer available options, and lower quality:
all conditions that induce some predictable behaviors from consumers and
producers alike.
“Automakers may spread that cost between U.S.-produced
and imported models, cut back on features, and in some cases, stop selling
affordable models aimed at first-time car buyers, as many of those are imported
and less attractive if they carry a higher price tag,” Reuters reported. In the short term, carmakers that are
less exposed to foreign supply chains may suffer lower revenue to crowd
upstarts out of the market. In the long run, “major automakers would have to
decide whether to ride out tariffs on a bet that they won’t last,” the dispatch
added. But because most car and parts-makers will have to shift at least some
additional costs onto consumers, “tariffs will cause annual U.S. vehicle sales
to fall to a range of 14.5 million to 15 million in coming years from 16
million in 2024.”
All this is quite unnecessary. It’s a rejection of the
hard-learned lessons Yergin and Stanislaw described. By the end of the 1970s,
“what had been confidence in government knowledge was now turning to cynicism,”
they observed. “The Keynesian paradigm was not what it seemed to be. It was not
all that easy to manage the economy by wielding the levers of fiscal policy. In
fact, it was not clear, with all the lags and uncertainties, that it could be
done at all.” Thus, the stage was set for the Reagan Revolution and the triumph
of supply-side economics.
Today, with progressives now decrying unnecessary
governmental red tape and talking up the importance of increased efficiency and
Republicans emphasizing aggregate demand, we’re through the looking glass.
History’s lessons are, however, clear: The Trump administration can declare war
on prices, but that’s like doing battle with gravity. The only question that
remains is whether Trump and his allies are so ideologically committed to
higher consumer costs that they’re willing to respond to the inevitable consumer
backlash before that frustration produces corresponding electoral consequences.
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