The tariff sledgehammer has a role, but it’s a limited one.
There’s an inherent tension in State-Corporate Capitalism. Proponents of the free market hold that any state Industrial Policy will fail because the State cannot pick the winners and losers as effectively as The Market. Yet Corporate Capitalism continually lobbies the State to lower interest rates and taxes, weaken the currency to make corporate products cheaper in overseas markets, erect tariff / trade barriers against mercantilist global competitors, etc.
In other words, the State should butt out of the free market except when it serves our purposes.
The other source of inherent tension is the State’s responsibility for more than boosting private-sector profits. Enterprises have the luxury of focusing on one thing: boosting profits and “shareholder value.” Governments have responsibilities far broader than boosting profits–for example, national security, which has been gutted by de-industrialization and the wholesale transfer of supply chains overseas.
Steep tariffs are now being deployed to correct the corporate offshoring that boosted profits so wondrously. The problem is tariffs are not enough to reverse offshoring to reshoring. Tariffs act as a useful sledgehammer but a sledgehammer has a limited scope of utility.
There are more moving parts in the decision to reshore than tariffs. What few realize is every State has a de facto Industrial Policy set by the entirety of State policies and regulations. This Industrial Policy is implicit rather than an explicit set of goals and policies, and so various pieces of this implicit Industrial Policy may actually be contradictory.
Just as the State doesn’t have the luxury of focusing solely on profit, corporations don’t have the luxury of gambling the company’s future based on one State policy that’s likely to change. Enterprises must consider a great many factors before committing billions of dollars to moving supply chains and production facilities. These include:
1. Tax structures
2. Regulatory burdens
3. Environmental requirements
4. Workforce availability and cost
5. Cost of capital
6. Availability of credit
7. Cost of healthcare for the workforce
8. Automation / AI
9. Domestic and global market conditions and competition
10. Public sentiment
The State’s policies set many parameters that affect decisions about reshoring: the complexity of tax codes, the cost of healthcare, the cost of capital, environmental regulations, the relative ease or difficulty of doing business, the availability and skills of the workforce, and so on.
The de facto Industrial Policy of the U.S. has incentivized hyper-globalization and hyper-financialization, to the detriment of the national interests and security. Wall Street, the political class and Corporate America benefited from these de facto policies while the bottom 90% lost ground.
The New Cost of American Inequality: $80 Trillion
Measuring the Income Gap from 1975 to 2023 (RAND)
$1 Trillion of Wealth Was Created for the 19 Richest U.S. Households Last YearThe richest of the rich in America control record slice of nation’s wealth. (WSJ.com)
These are not the result of “market forces,” they’re the result of State policies.
The point is all of these State policies have to be changed if we as a nation are serious about reshoring critical supply chains. Tariffs are not enough. I have long advocated here for a radically simplified corporate tax structure that’s a flat tax of 5% paid on whatever profits are reported pro forma quarterly.
Corporate taxes could be reduced for companies that source all components and assembly of their products in North America. There many ways to incentivize reshoring that are more reliable and actionable than tariffs alone.
I’ve advocated shifting the tax burden from workers and employers (Social Security and Medicare taxes paid by all workers and employers) to capital via transaction fees on all capital transactions and the elimination of tax giveaways / breaks for capital. Since the top 10% own / control 80% to 90% of all income-producing capital, a policy shift from labor / employers to capital would transfer the tax burden to the wealthiest Americans, those who have benefited so richly from the de facto policies of hyper-globalization and hyper-financialization.
I’ve also noted here many times that the current healthcare system will bankrupt the nation all by itself. Radical reforms are required to improve the overall health of Americans and reduce skyrocketing costs, many of which qualify as profiteering, fraud or needless paper-shuffling.
The tariff sledgehammer has a role, but it’s a limited one. If we’re serious about reshoring strategic supply chains, we have to tackle all the hard stuff that the wealthiest class wants to leave as-is because they’ve benefited so mightily from existing policies.
None of these reforms will be easy. There are many competing interests and complex trade-offs that must be negotiated so whatever pain is required will be distributed primarily to those who can best afford it.
These are the folks with the wealth and incentives to lobby the hardest for their exclusion from any pain, and therein lies the political challenge: do we leave the status quo intact because it favors the most powerful few, or do we put national security above private-sector spoils?
New podcasts:
Dismantling the Economic Divide (1 hour) (hosts Emerson and Amy)
Retirement Lifestyle Advocates w/ Charles Hugh Smith (host Dennis Tubergen)
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