Producers Are Consumers, Too

 

In debates on trade, it’s a sure inevitability that some free-marketeer will defend cheap imports on the grounds that they make goods more affordable to American consumers. This is, so far as it goes, absolutely true. But the equally inevitable retort from trade-skeptics that cheap flatscreen TVs are no good to those without jobs is also true, at least so far as it goes. Both sides, unfortunately are missing a critically important point: Most American manufacturers are also American consumers, and in a very significant way.

Just last month, our own Skipsul provided an eye-opening example of this in his piece “I, Circuit Board,” which detailed how his automotive electronics manufacturing company relies on a web of supply chains that stretch across half the world, starting with raw materials, and proceeding through a series of intermediate products that culminate in a single consumer good. And the less expensive a given input for Skip, the more money he has to put to other uses, whether it be lowering prices, improving his product, hiring new workers, increasing wages, or giving him enough cash on hand to pursue his hobbies or further upgrade his Ricochet membership. (Just sayin’. Hey, we’re an American employer, too!)

Of course, that doesn’t make it right when a foreign government (say, the Chinese Communist Party) decides to subsidize its input industries (say, domestic steel manufacturing) to give them an unfair advantage over ours. Indeed, we punish this sort behavior through anti-dumping laws that impose tariffs to offset the (again, totally unfair) advantages that foreign nations provide their industries. But, as Daniel Pearson recently argued on the Cato Daily Podcast, the downstream effects of this on American industry aren’t necessarily the ones we want:

We have to keep the US Steel Industry in perspective. It is not a small and insignificant industry. I would never make that argument. But the number of people employed by the US steel manufacturers is somewhere in the neighborhood of 100,000, give or take. The number of people employed by downstream manufacturing companies that use steel to manufacture their products: somewhere between six and seven million.

And the value added… for all primary metals, it’s somewhere in the $400 billion range… For the manufacturer[s] of the downstream products, it’s somewhere in the $6 trillion dollar range. So, you’re talking a factor of about 16 times more important, economically, to the United States is the downstream manufacturer than the primary steel production. So if we, as a country, adopt policies as we have to favor the steel producers we, in essence, have made a decision to disfavor the very important downstream manufactures. And so companies like Carrier [a favorite target of Donald Trump] they have to deal with economic realities and they have made decisions to move to Mexico where they can escape those costs.

This still leaves the question of what’s to be done about the Chinese stacking the deck in favor of their steel industry — or any other part of their economy — to the detriment of ours. Pearson offers an interesting half-answer that I won’t spoil for you that makes an important point: Retaliating against unfair practices by further restricting trade may hurt us more than them.

That doesn’t mean we should let bad actors get away with it; it means we should find ways of hitting them where it hurts while minimizing the harm to us. That takes both leadership and an understanding of economics.

There are 29 comments.

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  1. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    You can’t dump goods forever. Eventually subsidies stop prices reach equilibrium and new cheaper alternatives are developed. Why anyone thinks they can cheat the laws of economics over the long term is beyond me.

    • #1
  2. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    One quibble. Your title and the word Producers is currently Produces.

    As to your topic though, its kind of assumed (you have to be producing some good in order to trade and thus consume another if you are trading). The literal act of trading itself requires an abundance beyond personal utility that allows it to happen for both parties. You don’t trade good X if you need it more than the one trying to trade with you for it.

    • #2
  3. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    Could Be Anyone:

    One quibble. You title and the word Producers is currently Produces.

    It’s always where I don’t look … :(

    Thanks for the catch.

    • #3
  4. C. U. Douglas Thatcher
    C. U. Douglas
    @CUDouglas

    Tom Meyer, Ed.:

    Could Be Anyone:

    One quibble. You title and the word Producers is currently Produces.

    It’s always where I don’t look … :(

    Thanks for the catch.

    Not your week.

    • #4
  5. C. U. Douglas Thatcher
    C. U. Douglas
    @CUDouglas

    The problem with our modern understanding of economics is that it looks so darn simple and we convince ourselves we can improve a single transaction by changing things that seem to favor us. What we ignore is that a single, simple transaction is but one ripple in a lake, and changing that affects so much more.

    If anything, a single transaction is the flutter of the butterfly wing that causes a storm halfway across the world.

    • #5
  6. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    C. U. Douglas:The problem with our modern understanding of economics is that it looks so darn simple and we convince ourselves we can improve a single transaction by changing things that seem to favor us. What we ignore is that a single, simple transaction is but one ripple in a lake, and changing that affects so much more.

    If anything, a single transaction is the flutter of the butterfly wing that causes a storm halfway across the world.

    You can thank that scum Keynes. His incompetent, to say the least, economic theory based on demand has pervaded society for close to 100 years and it serves as the basis of most pro government intervention groups.

    • #6
  7. skipsul Inactive
    skipsul
    @skipsul

    Tom Meyer, Ed.: . But, as Daniel Pearson recently argued on the Cato Daily Podcast, the downstream effects of this on American industry aren’t necessarily the ones we want:

    This is a point that cannot be emphasized enough.  When you overly protect or subsidize any given industry or product (and this includes labor through things like the minimum wage), you just do not know or see who gets hit further along the line.  Someone eventually pays for it, even if the hit is distributed among many more people than those who receive the benefit.  Our protectionism and subsidies towards things like corn, soybeans, and sugar have not only walloped the international food markets, they have skewed the American diet drastically (just look at food labels to see the ways corn and soy products have wormed their way even into the unlikeliest of places).  We all pay for it when politicians meddle in things they do not understand.

    • #7
  8. KC Mulville Inactive
    KC Mulville
    @KCMulville

    Forgive my shameless plug, but this is why they started game theory.

    Strategy is the art of doing what you do, based on what you think others will rationally do. Every action has a reaction, and no opponent stands still. Game theory’s domain is to study all of it, i.e., complex systems where each move prompts a reaction from the other players.

    Economics is the most common field of game theory, and trade is probably the most dynamic strategy.

    Raw protectionism seems to be the equivalent of football’s single wing; that is, it’s the formation/tactic you first come up with. But experience shows that opponents have already figured out how to beat it, so you need an approach that goes beyond that first attempt.

    More importantly, though, our experiences with trade over the last several decades prove that the best approach isn’t following any single strategy … instead, it’s better to be agile, and be able to pursue multiple approaches at the same time.

    By the way, that’s the whole point of globalism – it’s intended to bind different countries (players) together, in so many details, so that every country will be forced to be responsive to other players. That whole strategy is useless if China is allowed to affect other players but immunizes itself against retaliation. (Which, because of our own indebtedness, we may have likely allowed to happen.)

    • #8
  9. Tenacious D Inactive
    Tenacious D
    @TenaciousD

    It’s not just American producers that are American consumers. I work for a Canadian company that often has projects in the USA. For such projects, a lot of the equipment to be installed is purchased from US manufacturers, a lot of the subcontractors are local to that city or state, and any people visiting the project site from Canada are staying at hotels and eating at restaurants in the area. Conversely, for our projects in Canada, there are still pieces of equipment that we purchase from the US.

    One project I was involved in (a wastewater treatment plant) had a ‘Buy American’ provision that added a whole lot of paperwork (and allowed the big companies that could provide suitable documentation to charge a premium) but I’m not sure how much difference it made beyond that. And in the long run I think such measures encourage American manufacturers to invest in lobbyists and lawyers rather than competing with Germany (which also manufacturers a lot of process equipment) on quality.

    • #9
  10. skipsul Inactive
    skipsul
    @skipsul

    Tenacious D:

    One project I was involved in (a wastewater treatment plant) had a ‘Buy American’ provision that added a whole lot of paperwork (and allowed the big companies that could provide suitable documentation to charge a premium) but I’m not sure how much difference it made beyond that. And in the long run I think such measures encourage American manufacturers to invest in lobbyists and lawyers rather than competing with Germany (which also manufacturers a lot of process equipment) on quality.

    The “Buy American” provisions are a fraud.  For “rolling stock” (aka vehicles), you can only meet the Buy America provision if at least 60% of the PARTS (not labor) cost of your product was sourced from America.  So, for a given product, since every electronic component likely came from overseas, even though the whole thing was designed and built at my own factory, I cannot meet the provision without lying (which is what a lot of the competition does).  American labor and engineering created these things, but according to the feds I cannot say “Made in America”, only “Assembled in America”.

    • #10
  11. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    skipsul:

    Tenacious D:

    One project I was involved in (a wastewater treatment plant) had a ‘Buy American’ provision that added a whole lot of paperwork (and allowed the big companies that could provide suitable documentation to charge a premium) but I’m not sure how much difference it made beyond that. And in the long run I think such measures encourage American manufacturers to invest in lobbyists and lawyers rather than competing with Germany (which also manufacturers a lot of process equipment) on quality.

    The “Buy American” provisions are a fraud. For “rolling stock” (aka vehicles), you can only meet the Buy America provision if at least 60% of the PARTS (not labor) cost of your product was sourced from America. So, for a given product, since every electronic component likely came from overseas, even though the whole thing was designed and built at my own factory, I cannot meet the provision without lying (which is what a lot of the competition does). American labor and engineering created these things, but according to the feds I cannot say “Made in America”, only “Assembled in America”.

    Given that most base components do not come from America can anyone claim something is “Made in America”?

    • #11
  12. skipsul Inactive
    skipsul
    @skipsul

    Jamie Lockett:

    skipsul:

    Tenacious D:

    One project I was involved in (a wastewater treatment plant) had a ‘Buy American’ provision that added a whole lot of paperwork (and allowed the big companies that could provide suitable documentation to charge a premium) but I’m not sure how much difference it made beyond that. And in the long run I think such measures encourage American manufacturers to invest in lobbyists and lawyers rather than competing with Germany (which also manufacturers a lot of process equipment) on quality.

    The “Buy American” provisions are a fraud. For “rolling stock” (aka vehicles), you can only meet the Buy America provision if at least 60% of the PARTS (not labor) cost of your product was sourced from America. So, for a given product, since every electronic component likely came from overseas, even though the whole thing was designed and built at my own factory, I cannot meet the provision without lying (which is what a lot of the competition does). American labor and engineering created these things, but according to the feds I cannot say “Made in America”, only “Assembled in America”.

    Given that most base components do not come from America can anyone claim something is “Made in America”?

    Sure, if you are using a US steel mill and machine shop.  In other words, Buy America favors only heavy industry at the expense of light industry and high tech.

    • #12
  13. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    skipsul:

    Jamie Lockett:

    skipsul:

    Tenacious D:

    One project I was involved in (a wastewater treatment plant) had a ‘Buy American’ provision that added a whole lot of paperwork (and allowed the big companies that could provide suitable documentation to charge a premium) but I’m not sure how much difference it made beyond that. And in the long run I think such measures encourage American manufacturers to invest in lobbyists and lawyers rather than competing with Germany (which also manufacturers a lot of process equipment) on quality.

    The “Buy American” provisions are a fraud. For “rolling stock” (aka vehicles), you can only meet the Buy America provision if at least 60% of the PARTS (not labor) cost of your product was sourced from America. So, for a given product, since every electronic component likely came from overseas, even though the whole thing was designed and built at my own factory, I cannot meet the provision without lying (which is what a lot of the competition does). American labor and engineering created these things, but according to the feds I cannot say “Made in America”, only “Assembled in America”.

    Given that most base components do not come from America can anyone claim something is “Made in America”?

    Sure, if you are using a US steel mill and machine shop. In other words, Buy America favors only heavy industry at the expense of light industry and high tech.

    Makes sense. I am reminded of Milton’s parable of the pencil – at some point the inputs or tools are going to come from somewhere else.

    • #13
  14. Brad2971 Member
    Brad2971
    @

    skipsul:

    Tom Meyer, Ed.: . But, as Daniel Pearson recently argued on the Cato Daily Podcast, the downstream effects of this on American industry aren’t necessarily the ones we want:

    This is a point that cannot be emphasized enough. When you overly protect or subsidize any given industry or product (and this includes labor through things like the minimum wage), you just do not know or see who gets hit further along the line. Someone eventually pays for it, even if the hit is distributed among many more people than those who receive the benefit. Our protectionism and subsidies towards things like corn, soybeans, and sugar have not only walloped the international food markets, they have skewed the American diet drastically (just look at food labels to see the ways corn and soy products have wormed their way even into the unlikeliest of places). We all pay for it when politicians meddle in things they do not understand.

    Everything that both you and Tom Meyer have said is quite true. At the same time, though, is it not possible to consider that certain folks who have been taking the hit more than others (i.e. the steel industry) with regard to federal policy or non-policy are not in the mood to hear that? Their pain is real, and they need it ameliorated. Sooner rather than later.

    • #14
  15. skipsul Inactive
    skipsul
    @skipsul

    Brad2971:

    skipsul:

    Tom Meyer, Ed.: . But, as Daniel Pearson recently argued on the Cato Daily Podcast, the downstream effects of this on American industry aren’t necessarily the ones we want:

    This is a point that cannot be emphasized enough. When you overly protect or subsidize any given industry or product (and this includes labor through things like the minimum wage), you just do not know or see who gets hit further along the line. Someone eventually pays for it, even if the hit is distributed among many more people than those who receive the benefit. Our protectionism and subsidies towards things like corn, soybeans, and sugar have not only walloped the international food markets, they have skewed the American diet drastically (just look at food labels to see the ways corn and soy products have wormed their way even into the unlikeliest of places). We all pay for it when politicians meddle in things they do not understand.

    Everything that both you and Tom Meyer have said is quite true. At the same time, though, is it not possible to consider that certain folks who have been taking the hit more than others (i.e. the steel industry) with regard to federal policy or non-policy are not in the mood to hear that? Their pain is real, and they need it ameliorated. Sooner rather than later.

    I know they’re not in the mood, who would be?  But how would you soften the blow?

    • #15
  16. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Tom Meyer, Ed.: Just last month, our own Skipsul provided an eye-opening example of this in his piece “I, Circuit Board,” which detailed how his automotive electronics manufacturing company relies on a web of supply chains that stretch across half the world, starting with raw materials, and proceeding through a series of intermediate products that culminate in a single consumer good.

    Good article, Tom, and thanks for linking to Skipsul’s article.  Anyone who hasn’t read it should.

    • #16
  17. Tenacious D Inactive
    Tenacious D
    @TenaciousD

    skipsul:Sure, if you are using a US steel mill and machine shop. In other words, Buy America favors only heavy industry at the expense of light industry and high tech.

    I hadn’t thought of it that way, good point.

    Last fall I did the public tour of Boeing’s plant just north of Seattle and I have to say that “Assembled in America” can be pretty darn impressive. A 777 has something like 3 million parts.

    • #17
  18. skipsul Inactive
    skipsul
    @skipsul

    Tenacious D:

    skipsul:Sure, if you are using a US steel mill and machine shop. In other words, Buy America favors only heavy industry at the expense of light industry and high tech.

    I hadn’t thought of it that way, good point.

    Last fall I did the public tour of Boeing’s plant just north of Seattle and I have to say that “Assembled in America” can be pretty darn impressive. A 777 has something like 3 million parts.

    It is indeed, but depending on how the government makes you figure things, you can’t count what you are actually doing, only the parts you buy.

    • #18
  19. Matt Upton Inactive
    Matt Upton
    @MattUpton

    skipsul: In other words, Buy America favors only heavy industry at the expense of light industry and high tech.

    I am shocked that a 1933 trade protection act has unintended consequences in unforseen industries nearly a century later.

    I work with a company that mostly performs federal contracts with the Buy American clause. It’s a running joke that we keep the Buy American screws locked up in a safe. They can run 3x the cost of Mexican or Chinese made equivalents.

    • #19
  20. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    Brad2971:

    Everything that both you and Tom Meyer have said is quite true. At the same time, though, is it not possible to consider that certain folks who have been taking the hit more than others (i.e. the steel industry) with regard to federal policy or non-policy are not in the mood to hear that? Their pain is real, and they need it ameliorated. Sooner rather than later.

    Well, two things:

    1. As Pearson and Jamie Lockett said, this policy is not sustainable by the Chinese. And if we pitch this to them as “Hey, thanks for the nearly-free steel, idiots!” they might smarten up.
    2. There are ways of retaliation other than a direct tariff on goods that might be more effective. A lot of Chinese movers and shakers want to send their kids to American universities. Now, stipulating that this would also have second and third order effects that would need to be gamed through, we could say “Hey, there are plenty of rich foreigners who would be more than happy to pay top dollar to have their kids educated here, and their money’s just as good as yours. Why exactly should we issue student visas to your kids again?”
    • #20
  21. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    Tom Meyer, Ed.: As Pearson and Jamie Lockett said, this policy is not sustainable by the Chinese. And if we pitch this to them as “Hey, thanks for the nearly-free steel, idiots!” they might smarten up.

    This being the most overlooked and yet most important issue at stake here. 6 – 7 trillion dollars of our economy is being subsidized by the Chinese willingness to impoverish their own citizens. Yes it sucks for one specific segment, but the longer the Chinese keep this up the more unstable their house of cards economy becomes. Fears of Chinese hegemony are overblown, as anyone who has actually traveled there or done business with the Chinese can attest.

    • #21
  22. Barkha Herman Inactive
    Barkha Herman
    @BarkhaHerman

    Jamie Lockett:Makes sense. I am reminded of Milton’s parable of the pencil – at some point the inputs or tools are going to come from somewhere else.

    Leonard Reeds.  I, Pencil.

    • #22
  23. Brad2971 Member
    Brad2971
    @

    skipsul:

    I know they’re not in the mood, who would be? But how would you soften the blow?

    At this time, given what’s happened with a lot of industries like steel, I’d say we should take our chances and create/implement policy that favors them. If it swings too much against everyone else, then ameliorate the effects from there.

    Too often, conservatives think working on the fly is anathema.

    • #23
  24. TKC1101 Inactive
    TKC1101
    @TKC1101

    Tom Meyer, Ed.:This still leaves the question of what’s to be done about the Chinese stacking the deck in favor of their steel industry — or any other part of their economy — to the detriment of ours. Pearson offers an interesting half-answer that I won’t spoil for you that makes an important point: Retaliating against unfair practices by further restricting trade may hurt us more than them.

    That doesn’t mean we should let bad actors get away with it; it means we should find ways of hitting them where it hurts while minimizing the harm to us. That takes both leadership and an understanding of economics.

    Their greatest fear is idle factories. Our greatest advantage is access to our markets. I await any clever ideas you may have to correct economic warfare that does not take advantage of this basic dynamic.

    Finding alternate suppliers is a lot easier than you think, particularly if our government can help the process to aid in finding a solution.

    • #24
  25. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Tom Meyer, Ed.: This still leaves the question of what’s to be done about the Chinese stacking the deck in favor of their steel industry — or any other part of their economy — to the detriment of ours.

    < devil’s advocate mode = on >

    Well, you could try negotiating a multi-lateral trade agreement which puts in writing the rules by which the signing nations agree to abide when trading with each other, and which sets up a tribunal process for adjudicating disputes peacefully.

    < devil’s advocate mode = off >

    • #25
  26. Klaatu Inactive
    Klaatu
    @Klaatu

    What is an unfair trade practice?

    Is it unfair when the Fed keeps interest rates near zero?

    When the DoD purchases planes from Boeing?

    When Georgia provides tax incentives to Kia to build a plant near LaGrange?

    • #26
  27. skipsul Inactive
    skipsul
    @skipsul

    Brad2971:

    skipsul:

    I know they’re not in the mood, who would be? But how would you soften the blow?

    At this time, given what’s happened with a lot of industries like steel, I’d say we should take our chances and create/implement policy that favors them. If it swings too much against everyone else, then ameliorate the effects from there.

    Too often, conservatives think working on the fly is anathema.

    The thing is, this has been tried endlessly for decades here already.  We “protect” industry A by propping up high prices (hurting downstream industries), then subsidize or “protect” those industries to ameliorate those follow on effects, then prop up someone else, etc.  Pretty soon you have armies of lobbyists gaming the entire system to preserve their fiefdoms of price supports and subsidies, and you can rarely ever untangle the mess.

    You can see the effects pretty clearly in the unholy alliance between the sugar and corn lobbies – the sugar industry is protected from imports and low prices, yet their products are generally priced beyond what commercial food processors can use (which is why most candy canes are now made in Mexico, where sugar costs half), while the corn industry gets endless subsidies and price supports to over produce and sell discounted corn syrup in place of sugar.

    Letting the feds keep trying to counter and counter-counter balance this mess instead just keeps entrenching further the corruption, and the consumers end up with the bill regardless.

    • #27
  28. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    skipsul:The thing is, this has been tried endlessly for decades here already. We “protect” industry A by propping up high prices (hurting downstream industries), then subsidize or “protect” those industries to ameliorate those follow on effects, then prop up someone else, etc. Pretty soon you have armies of lobbyists gaming the entire system to preserve their fiefdoms of price supports and subsidies, and you can rarely ever untangle the mess.

    So, in other words, you want to murder the white, working class? I knew it! ;)

    • #28
  29. Klaatu Inactive
    Klaatu
    @Klaatu

    Tom Meyer, Ed.:

    skipsul:The thing is, this has been tried endlessly for decades here already. We “protect” industry A by propping up high prices (hurting downstream industries), then subsidize or “protect” those industries to ameliorate those follow on effects, then prop up someone else, etc. Pretty soon you have armies of lobbyists gaming the entire system to preserve their fiefdoms of price supports and subsidies, and you can rarely ever untangle the mess.

    So, in other words, you want to murder the white, working class? I knew it! ;)

    Only Trump can solve.

    • #29
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