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A Tariff here, a tariff there
Articles- Mar 03,25
The proposal by Trump to impose tariffs has stirred the pot. Manufacturing will be the most affected. But, if followed through well, it can increase the global wealth, as well as wealth distribution in the next five to ten years, says R Jayaraman.
Any time you read that your government is erecting tariff barriers, supporting threatened industries with subsidies, or interfering in any way with free trade between individuals or nations, you must realize that your standard of living is being lowered as a result.
-- John Pugsley
Ever since America gave the second term, to Donald Trump, the world has seen interesting days. Trump is the ultimate ad-libber, his thoughts are so clear that the words pour out of him, without any restraint. Rarely does he feel the need to correct himself. And his thoughts are expressed directly, without mincing any words, and without much thought to couch harsh truths in polite language. In other words, he says what he wants to, and means what he says.
It is under these conditions that one should examine his recent utterings on tariffs. No one can claim that Trump is unaware of the effects of levying tariffs. Having conducted businesses in the world’s most capitalist country, and enriched himself beyond any sane man’s belief by mastering the art of deal making, he has carved out a niche for himself in being the maharaja of wheeling and dealing.
President Donald Trump is perhaps the first President, after President Ronald Reagan, to pay attention and heed to the need for America to improve its competitiveness. In 1987, President Reagan kicked off the Malcolm Baldrige Business excellence movement in America, which went a long way to restore manufacturing competitiveness. Not only that, it spawned a whole host of activities across the world, just like the Total Quality Management (TQM) movement did in 1950, to reduce waste and increase efficiency in manufacturing. However, by around 2010 or so, the world had caught up with America, and moved forward.
In 2012, Gary Pisano and Willy Shih, two professors from Harvard, wrote extensively about the dangers of offshoring manufacturing from America. They argued that, indiscriminate outsourcing will leave the American manufacturing industry weak, with an inability to innovate new products and goods. Over time, America will become dependent on others for basic supplies. I have myself written several articles in the press on this subject. Not only the US, but even Europe, went into China with both eyes fully closed and both ears plugged. The consequences are evident. In this period, America improved its competitiveness mainly by relying on the cost arbitrage, which was critically reliant on low wages.
Over the period, the offshore suppliers improved on many dimensions – on skills, on upgrading assets, on improving logistics, and so on. All these drove the wages up, and the suppliers, who had, by now, become the biggest cog in the American manufacturing wheel, began to assert themselves, leading to higher costs and loss of competitiveness in America. Since America did not have a tariff regime for most supplies, but most other nations had imposed tariffs on American imports, the US found itself in a Scylla and Charibdis position. With the loss of the cost arbitrage, American goods cost as much, if not more, than other countries, and, with the tariff on US imports imposed by other countries, the goods became uncompetitive. What Pisano and Shih had warned about had come true.
So, what should be the American response? Trump sees the imposition of tariffs as a logical step. These tariffs will make the landed costs of the imports go much higher than the locally manufactured products. This could result in lower imports, which could lead to inflation, if the gap is not bridged by increased by the American manufacturing sector. This situation provides an opportunity for ethe American Manufacturing Industry (AMI) to invest and expand capacity, thereby creating more jobs for locals. This increase in jobs need not result in lower wages, as the tariffs will provide the buffer. This increase in capacity, if done through application of Industry 4.0 techniques, such as, IIOT, ML/AI, Big Data and automation etc., could lead to higher operating levels, and the consequent lowering of costs, but this will take a few years. So, if tariffs are imposed immediately, the AMI will get a much needed breather, to catch up.
On the other hand, Trump could have done what Jimmy Carter did in 1979 to Chrysler – a loan guarantee from the government. In that case Lee Iacocca was able to prepay the loan. And the US debt position was not as bad as currently. As on date, USA is the most indebted country in the world, with a foreign debt outstanding of 26 Trillion USD. This is the other side of a tariff protection. Subsiding the costs of manufacturing for a specified period of time. This is being done for many agricultural products and food products currently. However, the financial situation of the USA makes this alternative a no-no. Overall, the tariff proposal by Trump appears to be a beneficial one for the AMI. Since the AMI contributes about 10% to the GDP, the increase in cost may not lead to a serious inflation situation.
What effect will the tariffs have on those countries on who the tariff is being imposed? For example, take Canada, and even Mexico, both neighbours bordering on either side of the US. With steel and automobiles coming under a 25% tariff umbrella, these two countries will face a big change. What could be the outcomes? The Canadian car makers, who are Ford, GM etc., may shut down capacities and transfer them to their American plants. Ditto for Mexico. Mothballed plants could come alive again. Jobs will be created in the USA, lost in C and M, and the cost of the output could go up. This possibility provides the US automakers to adjust their prices in such a way as to increase their profit percentage per car. US GDP will be positively affected. So, what do C and M do? Speedily bring down their costs through Industry 4.0 and innovations. Broaden their markets. This is a great opportunity to the proponents of Industry 4.0 and AI to prove their worthiness and usefulness to drive quantum changes. In effect, the imposition of tariffs by the US could be a game changer for its neighbours.
However, the same is not true for India and China. Both these countries have a large domestic sector to service, especially so in India. Also, both these countries are far more adept at handling such changes, as they have been at the receiving end of such changes for many years. Both of them have a diversified exports regimes, with a variety of goods. Especially at the middle price end of the spectrum – handlooms, textiles, handicrafts, fruits, vegetables, agricultural products, pharma. India’s trade with the US in 2023 and 2024 are shown in Table 1 & 2.
Clearly, India is not in as bad a position as C and M, not even China. However, this is an opportunity for India to improve efficiencies across the board and broaden its exports markets. The one area that may be adversely affected is the program that many MNC’s have followed in the past few years – move their manufacturing to India. Cummins, ABB, Siemens and many others are good examples. In fact, the combination of skills and cost in India is a world beater, and many companies have taken advantage of this, and moved supplier bases here, to service their global demands. While the China Plus One was very much in favour (and still is), this situation may change. There could be a reversal of this position for those companies wanting to supply to the USA – they need to establish plants in the USA. Already, companies like M&M, Tata, Hindalco and many others have operating facilities in the USA to cater to the demands in that continent. While the situation is so in the manufacturing sector, the GCC’s that are mushrooming in India could be hit badly if their services are also brought under the tariff regime.
Another scenario which could develop is that, countries like Canada, Mexico, China will start looking for alternate markets, possibly in Asia, Africa and Europe. Indias swift move for a FTA with Europe is an indication that both these entities are preparing to increase their bilateral trade. This could speed up the FTA between the UK and India too.
In all these cases, countries have to develop a short term and long-term approach, and use tools like AI and Industry 4.0 to develop strategies. A tit for tat response may not be the wisest one, there is a need for thoughtful and holistic scenario building. Overall, the proposal by Trump to impose tariffs has stirred the pot. Manufacturing will be the most affected. But, if followed through well, it can increase the global wealth, as well as wealth distribution in the next five to ten years.
About the author:
R Jayaraman is the Head, Capstone Projects, at Bhavan's S P Jain Institute of Management & Research (SPJIMR). He has worked in several capacities, including Tata Steel, for over 30 years. He has authored over 60 papers in academic and techno economic journals in India and abroad. Jayaraman is a qualified and trained Malcolm Baldrige and EFQM Business Model Lead Assessor.
US president
Donald Trump
US Tariff
Indian Manufacturing sector
India's exports
global wealth
R Jayaraman
Malcolm Baldrige Business
John Pugsley
tariff barriers
Total Quality Management
TQM
Gary Pisano
Willy Shih
Industry 4.0
China Plus One
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