Leibowitz: Thoughts for the holidays

Just a few days ago, President-elect Trump and his new BFF Elon Musk engineered a near-catastrophic government shutdown. The deal that emerged from that struggle strongly resembled the bipartisan compromise that Mr. T and Mr. M set out to destroy. They managed to strip from the bill about 1100 pages of text, much of which was intended to benefit many Democratic (and some Republican) constituencies. But the Trump demand that the debt ceiling be suspended was taken out of the bill, which sets up another Armageddon in March 2025. In three months, Republicans will be in charge in both the House and the Senate, which benefits them (if they can unite), but gives the Democrats another chance, the first of many, to frustrate the transformative change that Mr. Trump was elected to accomplish.

I am not at all against change. But I want change that will lead to a better world. To me, calls for change must be accompanied by concrete proposals for a new system or new institutions that are demonstrably better than those they would replace. That is a heavy responsibility because laying out the future means that one considers the consequences, both intended and unintended, of the new system or institutions.

Because I usually write about international trade, let’s talk about tariffs. That is neither a beautiful word nor an obscenity. It depends on the magnitude of the tariffs, or what they apply to. In an interview before the election, Howard Lutnick, the nominee for Secretary of Commerce in the new administration, stated that tariffs are, first and foremost, a negotiating tool. Fair enough; but if we don’t make a product and have no immediate prospect of making such a product, imposing tariffs on it will only hurt Americans along with foreign suppliers. If the government thinks that hurting foreign suppliers (say, of cars) is a higher priority for the US than avoiding harm to US consumers, imposing tariffs needs to be explained in those terms. And so, Mr. Lutnick explained, tariffs on products we don’t make in the US have “no point.” 

This principle applies not only to consumer goods but also to components and raw materials. Auto parts, transformers, lithium, and rare earth metals are also imported, and there is no near-term prospect that the US will make enough of those products to meet the demand for them. So tariffs on them don’t make sense. If hurting foreign suppliers, including China, is such a high priority, then the US (or its private sector) must find a way to reduce the need for those products.

A recent example is batteries. Now, the predominant technology is lithium-ion batteries. The US does not mine lithium; nor does China. But China controls the next phase of battery production (lithium refining) and the next stage after that (battery assembly). Breaking China’s monopoly on those stages is next to impossible, but there may be an alternative that the US can (and is starting to) look at. That technology involves batteries using sodium rather than lithium. If private industry can be encouraged to develop that alternative, government financial support might be constructive. Tariffs, however, will not help, so long as the sodium alternative is not in place. After it is in place, maybe.

Many other examples of the limitation, if you will, of tariffs could be cited. However, tariffs are not useful as a mechanism for developing alternative products. Electric cars are here, but China has developed into the leading global producer. The US is not pleased with that reality, but will 100% tariffs on Chinese electric cars reverse China’s lead? More than one billion Chinese consumers suggest that tariffs won’t work. China’s ascendancy can only be reversed by Western companies developing a better product at a lower cost. In the meantime, the US tariffs would only hurt US consumers without doing much damage to China’s competitive position. 

In time, the noise about tariffs will subside and genuine negotiations will take place. Other countries will act in their best interests as they see it, and the US will too. Tariffs will help focus these negotiations, but, as the last Trump administration learned, tariffs imposed will not necessarily stick around. 

All the best for a prosperous 2025!!