Peter Boockvar published this sentence before I did, so I will give him the origination credit. (See “Tariffs, ugh/Small business/Keep eye on JGB yields/Other,” https://peterboockvar.substack.com/p/tariffs-ughsmall-businesskeep-eye)
He wrote: “…putting tariffs on all the key EV related stuff will just put cheaper EV's further out of reach for lower income consumers and continue to put a bid under inflation.”
I agree with Peter.
Let’s be complete here. I criticized Trump for using tariffs and I still fault him for doing so. I criticize Biden for using tariffs and I still fault him for doing so. In the next six months I do not expect either one of them to back off the use of tariffs as a political tool. It appears that we will face a forthcoming election outcome of either Biden tariffs or Trump tariffs. Trump has promised to raise them. Biden has just raised them.
Why such harsh criticism?
Because, IMO, tariffs are counterproductive except for a direct wartime usage. How many readers can point to a single successful outcome from the Trump tariffs? If you can and will do so with citations and backup, I will assemble and publish your comments. I ask the same question about the Biden tariffs, which were continued post-Trump and are now being increased.
And how much inflation pressure do we see because of tariffs? They trigger rising prices, so there must be some. Estimating a direct number is difficult. How much higher are interest rates than they would otherwise be because of tariffs? Much harder, but if tariffs raise prices and the Fed wants prices not to rise as much, there must be a degree of causality. There are many questions.
Tariffs operate like a national sales tax. They are not levied ON a foreign business or country; they are a type of targeted domestic tax. They are collected by American businesses, and those businesses remit that money to the US Treasury. I repeat: A tariff is a tax. Trump knew it and did them anyway. Biden knows it, too. So, Peter Boockvar is correct when he says that a tariff on Chinese-made electric vehicles will raise the cost of an EV to a low-income buyer. IMO, Wealthy buyers won’t “feel it” very much. That is what happens.
Do tariffs create or maintain jobs in America? They may do so, or they may not do so, but they also raise costs. Last time I looked, that was inflationary.
Let me give a service sector example of a competitive situation without a tariff. You can go (virtually) to the Philippines today through an LLC or consultant and hire a “virtual assistant” to help you with your office administrative functions. You can interview (Zoom or Teams) people to find one who seems compatible. The language spoken is English. The skill-set level is high. You have hired a virtual worker in a form of work-from-home. The cost today is about $7 an hour or about $280 for a 40-hour week. Where did I get this information? I privately interviewed an American entrepreneur (name withheld) on what he is doing. He is satisfied with the quality of the work done and is expanding usage of this service.
It would cost him about $30 per hour to obtain a similar service in the US. And he would have to screen and hire until he found an acceptable home-based option. That is very hard in today’s tight labor market.
There is no tariff on this transaction. It would take a 300%-400% tariff to equalize with the domestic American cost. So, what if the tariff is just 100%, placed by Trump on foreign-sourced labor or by Biden because the service is on the target list. The American firm would pay it as a tax. The American firm’s cost would go from $7 per hour to $14 per hour. Not one new American job would be created. The only outcome would be a higher cost and that might or might not fully flow through to broad-based measures of inflation.
Now take that example and use it for an electric vehicle part. Raise the cost attached to the labor component of the part from $7 per hour to $14 per hour. Not a single thing changes in the workforce of the United States. Only the cost goes up.
Would you ever use tariffs? I get that question frequently. The answer is yes. As a tool of war. Sanctions are restrictions used in war. Why not use tariffs as well? I would link them.
I believe we are engaged in an expanding war with Russia and Putin’s friends, who are ruthless. So, tariffs can be added to sanctions. Example. Impose a 1000% tariff on anything that has Russian content. That’s right, 1000%. I’m making it large for emphasis, knowing that vodka and caviar lovers may not like it. If an American firm imports anything that has Russian content, they must collect a 1000% tariff on the content portion. Using a cost-raising technique for the purpose of weakening the economic function of an enemy would be the tariff goal. And if the situation changes to a non-war status, I would remove or reduce the tariff to encourage a more peaceful outcome. Imagine a partial-content tariff at a very high level on Russia, Belarus, Iran, North Korea, and others. Imagine if other Western countries followed suit.
But tariffs to raise the price of an electric vehicle for lower-income Americans? That worries me. It will worry the Fed, too when it shows up in a broadly computed higher price level in some inflation index a few months from now.
PS. In the example of the job in the Philippines, think about the impact on US labor force statistics. The job doesn’t count as employment in the US. No BLS adjustment for it. The job opening doesn’t appear in the JOLTS report. There are no payroll taxes or FICA collected. The cost is a direct or consulting business expense. Just think about the implications, and one can quickly see how really tight labor conditions are in the US because of the adjustments not being made for entrepreneurial innovation.
For any details about EV stocks or ETFs or Cumberland equity portfolios, please contact my colleague Matt McAleer.
David R. Kotok
Co-Founder & Chief Investment Officer
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