Tariffs on Chips

[Esquire Bertissimmo]

Trump is putting a 25% - 100% tariff on Taiwanese semiconductors.

The goal is to increase US chip production and it probably will, but at what cost?

US consumers will face huge increases in the cost of electronics. US electronics manufacturers that currently use cheaper and higher quality Taiwanese chips as intermediate goods will become less competitive. And, worst of all, these tariffs will increase the cost and reduce the quality of all electronics economy-wide, which will reduce productivity enhancing investments across every sector at precisely the momentum when AI is taking off.

This pain will last at least 5 years, the most optimistic timeline for new semiconductor factories to be built in the US.

The Biden's approach of subsidizing US chipmakers was also flawed, but it at least prevented a disastrous disruption to the US economy's access to cost-competitive and high quality semiconductors.

[Jamiet99uk]

Since when did you start calling the former president "The Biden" ?

[Esquire Bertissimmo]

Around his 1000th birthday it felt more appropriate to start referring to him as an entity rather than a person.

[Octavious]

It sounds rather good, actually. Has a central European aristocratic feel to it. I reckon his campaign team missed a trick.

As with all things Trump, I'll believe it when I see it. Until then this could be anything from a trade negotiation tactic to a desperate attempt to encourage domestic production before Communist China takes the island. If the latter it means that Trump has concluded that fighting China over the future of Taiwan isn't worth the cost or (rather more alarmingly) isn't a fight they can win. China's production of amphibious assault ships continues at an alarming pace

[Esquire Bertissimmo]

Trump said rather clearly on Rogan that he would use the mere threat of tariffs to try to re-shore US production. The problem with this strategy, however, is that when you say you're bluffing on the world's largest podcast people will hear you. And then what good is your bluff?

If Trump does the semiconductor tariffs he'll benefit a very small sliver of the US tech sector at the expense of the rest of US tech and the broader domestic economy. The US should improve its domestic chip industry for national security reasons, but the tariff approach will be more harmful to its broader tech sector than the previous subsidy approach.

If Trump does not do the tariffs he'll have wasted some of the firepower behind his already ostentatiously revealed bluffing strategy and they'll no longer have an impact on investment decisions.

In the interim the uncertainty he's created is damaging relations with a key ally, creating massive investment uncertainty both at home and in Taiwan, and doing little to actually reduce the US' vulnerability to semiconductor shortages in the case of a Chinese invasion of Taiwan.

[Jamiet99uk]

Donald Trump and his supporters do not understand how tariffs work. Trump has demonstrated that in public multiple times.

[Octavious]

Donald Trump and his supporters do not understand how tariffs work. Trump has demonstrated that in public multiple times.

See, I would call that an obvious lie.

What we have to differentiate is the US public message from the US private message. We have no firm idea of what the governments of the USA and Taiwan are actually saying to each other. Taiwan itself doesn't seem to be in anything resembling panic mode over this, so one can assume they're not anticipating a 100% tariff any time soon.

We wait and see.

[Jamiet99uk]

Donald Trump and his supporters do not understand how tariffs work. Trump has demonstrated that in public multiple times.

See, I would call that an obvious lie.

What we have to differentiate is the US public message from the US private message. We have no firm idea of what the governments of the USA and Taiwan are actually saying to each other. Taiwan itself doesn't seem to be in anything resembling panic mode over this, so one can assume they're not anticipating a 100% tariff any time soon.

We wait and see.

Donald Trump has repeatedly said that he thinks foreign governments pay tariffs.

[Esquire Bertissimmo]

Oct I'm sorry but what the hell are you talking about?

Taiwan's government is having emergency discussions about how it will respond to the tariff threat, including preparing a bail out package for affected industries. Do you just say this shit without reading anything about it or even thinking it through just a tiny bit? Of course they're in panic mode lol, what country wouldn't be when the most important buyer of their most important export threatens massive sanctions?

[Octavious]

I've looked through my usual Taiwanese news sites and, whilst it's a big story, it's not exactly dominating the airwaves. There were a few interesting articles about chips and the various markets they supply, but it was making far fewer waves than I was expecting. There isn't a panic.

[Octavious]

Donald Trump has repeatedly said that he thinks foreign governments pay tariffs.

That can effectively be true. Consider the totally fictional example of MexGrain. The want to sell lots of grain to the US. The US slaps on a 20% tariff that would make them unable to compete with US grain, but the Mexican government gives them a great big subsidy so they can. In this case the foreign government is effectively paying the tariff.

[Esquire Bertissimmo]

Donald Trump has repeatedly said that he thinks foreign governments pay tariffs.

That can effectively be true. Consider the totally fictional example of MexGrain. The want to sell lots of grain to the US. The US slaps on a 20% tariff that would make them unable to compete with US grain, but the Mexican government gives them a great big subsidy so they can. In this case the foreign government is effectively paying the tariff.

The economic incidence of tariffs can be quite complex.

Tariffs are paid directly by US importers at the border, who then pass on at least some of the tariff amount to US consumers who are effectively paying an additional sales tax on that good. But the exporting firm will, in many cases, reduce their sale price at least somewhat in an effort to ensure their price + the tariff still allows them maintain market share in the US. The US is in a unique position of having monopsony power (i.e., being a major purchaser) over many of its imports, which increases the chance that a firm exporting to the US will choose to eat at least some of tariff increase by lowering their margins. This, however, breaks down in cases where global demand for the tariffed good is high and it is difficult to rapidly increase supply (e.g., semiconductors) - in these cases, US consumers are very likely to eat most of the tariff increase via higher prices.


When US tariffs are high enough, broad based, and targeted against a foreign economy that relies heavily on exports to the US, they can affect that country's exchange rate with the US dollar, which is another way for a foreign country to "pay" some share of the tariff amount.

And, as Oct mentions, if governments bail out industries facing US tariffs (as Taiwan and Canada have promised to do) then they are quite directly paying for the tariffs.

All these nuances, however, miss the big picture. The US cannot become wealthier as a nation by curtailing imports that, by necessity, are coming into the country because they are higher quality and/or cost competitive. Shielding domestic sectors can cause them to grow, but it removes critical incentives required for them to offer citizens the best products at the lowest costs. Moreover, most trade today is in intermediate rather than final goods, so tariffs hurt the dynamism of the US economy more broadly and will reduce its export competitiveness (which will in many cases result in the unintended consequence of the US ultimately importing many more final goods from countries that maintain tariff free access to the world's best and cheapest intermediates). US tariffs will also trigger retaliatory tariffs that compound harm to the US economy.

[Octavious]

For the most part I agree. It's worth underlining the fact that retaliatory tariffs, in cases of very large trade imbalances, carry far less weight than the original tariff. It can hurt, sure, but the lion's share of the pain falls on the retaliating nation and the US government has the ability to use the tariff revenue to mitigate the pain its exporters receive.

Ultimately every time the government exercises power someone suffers. The Trump administration has taken the view that the trade imbalance has become a significant enough problem that action is required, and that will inevitably result in pain. Their calculation is that most of the pain will fall abroad, and the pain at home can either be mitigated sufficiently or will fall on the shoulders of people they can afford to piss off. We shall see.

The European Union has traditionally been far worse as far as trade relations go. Their habit of massively subsidising European farmers and flooding 3rd world markets with the ridiculously cheap produce has done huge amounts of damage to 3rd world producers over the years. The third world lacked the economic clout to do much about floods of cheap foreign imports. The US very much has the clout, but has only just acquired the will.

The impact will depend upon multiple factors and international negotiations, but I suspect that it will lack the drama the media is hoping for. Taiwan is not panicking. To quote from the Teipei Times:

Minister of Economic Affairs J.W. Kuo (郭智輝) said he only expected a small impact from any tariffs imposed by Trump on semiconductor exports given their technological superiority

I suspect he's right. Time will tell.

[Esquire Bertissimmo]

Your analysis above is missing a few points.

Tariffs don't only "hurt some people, help others", they will impose a *net* loss to the US economy. For the tariff approach to be worthwhile on balance you typically need some strong exogenous factor. National security and attempting to enforce better trade policies (e.g., stopping IP theft) are two good rationales to, for example, tariff China. Trying to gin up a domestic sector that you feel cannot compete on merit (e.g., US semiconductors) is a much weaker rationale. The problem is that there is little evidence that tariffs actually do much to further these objectives. And moreover, these other issues that might justify tariffs are mostly beside the point in Trump's rhetoric, which is focused on reducing bilateral trade deficits (and to Jamie's point, that exposes Trump as being either genuinely economically illiterate on trade, or willingly misleading to the US public).

The claim that countries are harmed by being "flooded" with cheap goods is extremely suspect. If your country gets cheaper and higher quality food from somewhere else, paid for in part by another country's taxpayers, that is a net benefit to your economy. It's not great for your farmers in particular, but it means your economy is receiving a huge windfall and frees up labour and capital to produce other goods that you aren't already receiving in abundance. The losses to the farmers could be more than compensated by the gains to the rest of the economy - if this doesn't happen its a governance issue on the part of the recipient of artificially cheap imports, not the fault of the exporting nation. The developing world benefits from cheap food and t-shirts, they are not poor because of these things. Likewise, the US consumer is a huge beneficiary of Chinese industrial largesse. It is the citizens of the countries exporting subsidized goods who should be mad.

The Taiwanese are in the privileged position of having surplus non-US demand for semiconductors. That doesn't mean tariffs won't hurt their bottom line. We'll continue to disagree on the word "panic", but an emergency cabinet meeting about how to respond belies a level of concern that would not be strategic to communicate out loud.

[Octavious]

If by "extremely suspect" you mean "common sense and very well documented" then I'd agree

And what exactly do you expect these African governments (which, if we're being totally honest, are rarely exemplars of forward thinking and transparency) to do? Shove an emergency tax on the people and use it to pay farmers to do nothing for a few years on the off chance that Europeans start behaving themselves at some point? There'd be revolutions.

No, what happens is exactly what you'd expect. African farms either go bust completely or find it impossible to find investment as there's so little money in it. Local food production capacity falls off a cliff. And then one year the European harvest is poor or the CAP is changed and the imports dry up, and the Europeans wonder why there's a famine in parts of Africa again.

Capitalism is the best system we have, but it has blind spots. Without oversight it will make decisions that may be financially sound but utterly unacceptable from a human perspective.

[Jamiet99uk]

Octavious, I am curious, as a supporter of capitalism are you generally a supporter of free trade?

Do you believe in the theory of comparative advantage?

[Esquire Bertissimmo]

I'm also curious re: Jamie's question.

But to respond to Oct:

Oct, you recognize it as good for the US when it imposes tariffs on another country and when that other country's government uses taxpayer money to bail out effected industries.

The exact same logic applies when a country imports any good that was subsidized by the exporter.

In the developed world we have many tools to redistribute the gains and losses from such a bargain. We choose not to at our own peril. Most developed countries have done better than the US at ensuring that the gains from trade are redistributed - Detroit and the opioid crisis are not the inevitable consequence of trade, but rather reflect an extraordinarily neglectful government failing to redistribute the gains of trade. In the case of defense-relevant goods (steel) we should still import artificially cheap products and then just subsidize domestic production if we're worried about long-term capacity. It's the Chinese taxpayer who is the sucker in this situation, not the Western worker/consumer.

In the developing world tax capacity is poor and their only realistic way to tax the gains from, say, artificially cheap ag imports, may be through tariffs. Some developing countries do impose these, but many choose not to because the huge consumer gain of cheap high quality foodstuffs is recognized as a major benefit. Nearly all countries are net food importers and the greatest developing economy success stories (Korea, Singapore) happen to rely more heavily on food imports than most. The most reliable preventor of famine is not a cossetted domestic food production industry, but a robust-enough economy that can continue to purchase food imports through a crisis. Economic development is not well served by using the state to force specialization in industries where you already have access to cheaper and higher quality imports.

I'm curious in how you might respond to Jamie's question because in this thread you're parroting the old socialist "infant industry" argument, which has not been well borne out by the evidence. Is your trade skepticism longstanding? Or is it mental gymnastics you've adopted in the Trump era to reason backwards about why his position is actually genius?

[Octavious]

Octavious, I am curious, as a supporter of capitalism are you generally a supporter of free trade?

Do you believe in the theory of comparative advantage?

Generally speaking. Free trade in the true sense demands freedom from subsidies and tariffs, which we've seldom come close to achieving. You need certain industries to continue at home, even when uncompetitive, for the sake of national security. Also rapid change can bring far more hardship than is worth enduring for the benefits. Free Trade in absolute terms can create more drawbacks than is politically acceptable. Some degree of oversight is required.

Bert, your anti Trump fervour is blinding you to what I'm actually writing. Recognising that there will be some benefits is a million miles away from supporting it, and falsely claiming I have described it as genius is frankly a level of ignorance and dishonesty I don't expect from you. My instincts are conservative. I find pretty much all forms of rapid change suspicious, and this is no exception. But I am content to wait and see. To see what policies are actually implemented, which can be rather different to media bluster. And to see what the impact of the policies actually turn out to be

[Esquire Bertissimmo]

My instincts are conservative. I find pretty much all forms of rapid change suspicious, and this is no exception. But I am content to wait and see. To see what policies are actually implemented, which can be rather different to media bluster. And to see what the impact of the policies actually turn out to be

I just wonder if this sage-like patience would have applied to, say, a Bernie Sanders presidency with more-or-less the same approach on trade. I suspect not, but that's imputing a lot. I will be interested to see, if there are negative impacts from Trump's trade policies, whether you ever acknowledge them - or will it be an endless series of prevarications, wait-and-sees, we can't know for sure, etc.

I think there are good reasons to be concerned now, even if only by the rhetoric. No doubt my perception of the risks is coloured by being in Canada, which is a prime target for Trump's beggar-thy-neighbour bullshit.

[Esquire Bertissimmo]

We may get to find out soon enough. Trump says 25% across the board tariffs on trade with Mexico and Canada starts next week. USMCA wasn't worth the paper it was written on. Don't disregard all the media "bluster" on this one. It is foreseeable that this will be lose-lose for all three nations, the only wait-and-see will be for how bad it gets.