The new tariff regime instituted by the United States over the past couple of weeks is creating uncertainty in the executive world. Questions on how it affects an industry abound and answers are not plentiful.
Two camps have clearly emerged, with little room in between for indecision: pro tariffs and against. My friend and colleague Ray Wang wrote a convincing case for the tariffs and the downstream effects they could have for the American economy. Only time can tell if this method he proposes will play out, and I cannot say with certainty it will not.
I do have an alternative model, one that continues what has worked well in the past 65+ years. There are four reasons why continuing the existing model is a better bet:
- Globalization has not failed (including the WTO). It is not a movement intended to level the playing field for everyone involved, it leverages what every country does best and promotes and rewards those that focus on that.
No single country in the world can ever do everything great: a rising middle class does not want to sit in a hot, dirty, dangerous coal mine or manufacturing facility to earn the same or less they could make in a service job. They prefer to code a social-media app while sipping matcha smoothies and playing foosball.
This is an intrinsic part of the evolution of the United States in the past few decades. Trade imbalances are not only acceptable but also expected for the American economy. Countries that can manufacture better, cheaper, faster than us, should – and we will buy their output because our time is better spent creating better profits via service solutions.
- The United States is no longer a manufacturing economy. One hundred 100 years ago, manufacturing was the key to the American power in the world. Starting in the early 1900s, our innovations in manufacturing led the world to better and more precise tools and processes, ending with the hegemony we displayed during WW2 with almost impossible production of war machines and supplies. Post WW2, manufacturing led the growth of the American economy and the creation of a middle class that remains to this day a model for developing countries to follow.
In the 1980s, this middle class shifted towards consumerism, at the same time the manufacturing class was beginning to decay in quality and abilities. New manufacturing prowess emerged (mostly) in Asian countries, with Taiwan and Japan leading the way. We conceded that role of leading the world in manufacturing to shift towards a service economy that produces more than 100 times more revenue, and 50 times better margins.
This is our new reality, and the reason we are seen as the leader in technology, software, services, and even distribution of American non-durable goods and services around the world. Our economic power today is predicated in outsourcing the low-level, thin-margins, exhausting and un-interesting jobs to places better suited for them (developing countries that are where we were 100 years ago) in exchange for a focus in better jobs with better revenues.
- Consumer sentiment is the basis for the new economy. While I admit to a nostalgic bend in my life, it is not the foregone days when we could manufacture cars and refrigerators better than anyone. The interesting part of the economic shift over the last 40-50 years is not unique to the United States. Consumerism is a global trend, and one that newly emerging middle classes in places like Nigeria, India, China, and other up-and-coming countries quickly embraced as they grown. I am very happy, as are most Americans, with the ability to buy a new, bigger, better TV for a low-price every few years. This shift to consumerism must be fueled by cheaper manufacturing.
Any economist will tell you that consumer sentiment, and the accompanying spend into a consumerist model, is what powers economies today. A service economy produces better margins, more disposable income, and better living conditions that in turn require an environment where those gains can be spent forwards a better life. That Is the power of the middle class.
- History has proven tariffs to not work. The US tariff regime of the 1930s, implemented to help pull the us out of the grand depression, took almost 80 years to fully unravel. It also did not have the intended effect: while it worked for a while, long-term growth was driven by a service economy and outsourcing of manufacturing, not the return of manufacturing to replace imports.
Economic models shifted dramatically in a world where globalization drives economic growth, and people out of poverty, around the world. The pandemic left us without a “normal” model of operation, but a return to nostalgic models that were proven wrong before is not the answer. The trade imbalance in durable goods manufacturing is replaced by a trade surplus in services that is magnitudes bigger than any potential increase in revenues from manufacturing. With better margins.
Trying to recreate the infrastructure we need to become a manufacturing nation again is prohibitive in cost, time, and resources. We won’t find the workers willing to take the jobs at the prevailing wages. We won’t find the machinery in time to replace what is intended to being replaced. We won’t find the know-how. We can do it, but it is not the way. Not following a model that has proven to not work before.
As I said, only time will tell which model is proven right. I don’t believe tariffs are the way, nor do most economists and experts.
Using tariffs to bring trading partners to the negotiating tables? Well, it seems to have worked – but as always, there are better methods grounded in diplomacy and communication over exerting muscle.
No?
