Can We Talk About Tariffs?

[Dan Warnick + 6,100]

Hi All.

I'd like to have a discussion about tariffs, mainly because I want to see if I truly understand them, but also because there are some really intelligent people on this forum who have a lot of different education and experience than me and I think we could all learn something from a sane discussion about the matter.

So, here goes.  I believe any tariffs that Trump and the other "intellectuals" in Washington could impose are against goods coming into the U.S., not goods going out of the U.S.  Is this correct?  This would be true whether we are talking about raw materials or manufactured goods, right?

If so, wouldn't that mean that Harley Davidson management, for example, are telling fibs about why they are moving some of their production to Europe?  Harley management has clearly stated that there is a large market in Europe for their products and they would like to increase sales there.  They have indicated that duties and tariffs added up to result in a much higher price tag for their products in Europe, which they believe and I would tend to agree, is a somewhat strong limiting factor to increased sales in an otherwise willing market.  However, the narrative quickly moved from being a (controversial) financial decision made by Harley management to one caused by Trump's tariffs.  In fact, again if I'm right about this, the duties and tariffs Harley is being affected by are the ones imposed by Europe, not Trump's, especially since they haven't gone into effect as yet and may never actually materialize.

Again, I'm here to learn, so I'm willing to listen if people have other views.  I know, for example, that Trump's tariffs on some raw materials will add some cost to the manufacturing of Harley products, but it would seem not very much (we're talking about motorcycles and for all I know the raw materials and the parts made from them might, and I don't honestly know, might already be made outside of the U.S.).  If I have got this right, then it would seem that Harley management made a sound financial decision to move some production to Europe to secure market share.  That is a smart move, financially, but not for employment in and around their existing U.S. facilities.  It sure looks like Harley management has simply jumped on the bandwagon so that they don't have to face their employees and communities with the truth.

What do you think?

[Jan van Eck + 7,558]

While there are "export controls" on goods leaving the country  (including cash, incidentally), you only get export "tariffs" on actual cash being taken out, where you are charged income tax at the maximum rate.  Other goods, and I am excluding military goods, are not taxed in export. 

Getting past that,  Mr. Trump  started the trend by hitting steel and aluminum in various forms  (bar, plate, ingot, wire) with tariffs of 25% for steel and 10% for aluminum.  He had no realistic option for the aluminum as aluminum is formed by electric reduction from bauxite, and you need staggeringly vas amounts of electricity.  So the big smelting operations are in Canada, where you have these giant rivers cascading down off the QUebec Plateau, and in China, where large rivers flow down from the Himalayas and the North face of the Mongol plateau.  Since the ARio Tinto aluminum operation in Canada is already bigger than all of US production combined, and since some 95% of Canadian aluminum goes to the USA, to hit aluminum with a hefty tariff (i.e. 25%)  would be suicide for US aluminum users, their products could then not compete on the world market. So Trump used 10%, but it was stupid, and hurt US business and nobody else.  That part was all for show.

Now the steel tariffs of 25% are more interesting.  Today most US steel is recycling scrap, little is from ore.  The big ore-based operations used anthracite coal to make coke and then the coke to make steel, so US ore is shipped from Minnesota to Pittsburgh and Allentown, PA, in order to be close to the coal operations. If you go to either town you will see miles upon miles of old abandoned steel plants along the riverbanks.  those places are no longer usable, been down too long. US steelmaking fell apart due to legacy promises to the unions for paid pensions and healthcare, it got so steep that the owners could not even give the companies away due to the legacy costs.  So it all went bankrupt. 

Meanwhile you have these Canadian steelmaking operations in several locations, basically Hamilton Ontario at the far Western end of Lake Ontario, and Algoma Steel up in the Soo, or Sault Ste. Marie area.  The Hamilton plants are very old, the legacy operations in Canada, and today two plants, "Stelco II," and "Dofasco II," remain and run nicely.  There was a third mill but that is now gone.  Stelco II  (my designation) is the Steel Co. of Canada, and that was owned by US Steel, went bankrupt, recapitalized along with the remnants of the US operations out of that bankruptcy, and is now pretty much owned by the Americans, as I understand it.  Half that production output goes to the USA as hot rolled steel coiled for use by US automakers in their stamping plants.  It is a specialty steel and cannot be easily replaced so right now the US customers have to "eat" the duty, because these supply chains are so integrated. Heavy plate steel will I expect largely go over to the plate mills located in Alabama and Mississippi, so they benefit from the tariff.   More in the next post on this long saga. 

[Jan van Eck + 7,558]

Steel saga, Part II

You have these integrated supply chains across the US-Canada border.  For example, the Canadian Govt has let contracts to build two new Arctic icebreakers, which are military contracts.  For domestic voter consumption purposes, one ship is being built in the Davis Shipyard in British Columbia, and the other on the East Coast I think in Halifax.  Now the B.C. shipyard is owned by the Americans, so the real benefit (to the voters) is the local employment.  Meanwhile the yard has purchased the specialty plate steel for the hull from a mill in Alabama, which is set up to roll high-strength steel with anti-corrosion properties needed for ships.  And the reason the mill is in Alabama is that both Alabama and Mississippi have these private yards that build US military ships, so the plate mill is next door.  

Could Davis have bought from the mills in Hamilton, and paid rail freight to bring it to Vancouver?  Sure, except that specific grade of steel is not rolled in Hamilton. It could be, if there was enough lead time, but meanwhile the contracts are already let.

And that brings up to the real reason the Canadians are livid:  their product sold to the automakers is being hammered, but meanwhile the Cdn taxpayers are supporting some mill in Alabama on millions of dollars of heavy plate. 

Originally the Canadians calculated that they would receive a "waiver" from the tariffs, but when Trump did not do that, all hell broke loose.

Meanwhile, over in Europe, there are lots and lots of legacy steel mills, especially in France and Germany, which have been supported by taxpayer bailouts for decades.  ULtimately Mittal Steel out of India bought most of them up and is the big integrated player in europe.  But given the chronic over-capacity, europe needs the US markets or their voter steelworkers go on the dole. Was Acelor-Mittal dumping steel into the US markets?  Of course they were. And so Trump decided to stick it to them.  Nothing they can do about it. 

Aside from certain tool steels, which are high specialty steels (and I think not being dutied), the run-of-the-mill stuff is lower grade, such as "rebar," used in concrete construction, that sort of thing.  And nobody in the USA cares if European rebar gets whacked, the stuff is available everywhere. 

The big dumping threat comes from China, where their aluminum capacity totally swamps Canada, and there are lots of steel mills, again over-capacity seeking to find a home.  And the Chinese are notorious dumpers. 

More in Installment III to come. 

[Dan Warnick + 6,100]

29 minutes ago, Jan van Eck said:

While there are "export controls" on goods leaving the country  (including cash, incidentally), you only get export "tariffs" on actual cash being taken out, where you are charged income tax at the maximum rate.  Other goods, and I am excluding military goods, are not taxed in export. 

Getting past that,  Mr. Trump  started the trend by hitting steel and aluminum in various forms  (bar, plate, ingot, wire) with tariffs of 25% for steel and 10% for aluminum.  He had no realistic option for the aluminum as aluminum is formed by electric reduction from bauxite, and you need staggeringly vas amounts of electricity.  So the big smelting operations are in Canada, where you have these giant rivers cascading down off the QUebec Plateau, and in China, where large rivers flow down from the Himalayas and the North face of the Mongol plateau.  Since the ARio Tinto aluminum operation in Canada is already bigger than all of US production combined, and since some 95% of Canadian aluminum goes to the USA, to hit aluminum with a hefty tariff (i.e. 25%)  would be suicide for US aluminum users, their products could then not compete on the world market. So Trump used 10%, but it was stupid, and hurt US business and nobody else.  That part was all for show.

Now the steel tariffs of 25% are more interesting.  Today most US steel is recycling scrap, little is from ore.  The big ore-based operations used anthracite coal to make coke and then the coke to make steel, so US ore is shipped from Minnesota to Pittsburgh and Allentown, PA, in order to be close to the coal operations. If you go to either town you will see miles upon miles of old abandoned steel plants along the riverbanks.  those places are no longer usable, been down too long. US steelmaking fell apart due to legacy promises to the unions for paid pensions and healthcare, it got so steep that the owners could not even give the companies away due to the legacy costs.  So it all went bankrupt. 

Meanwhile you have these Canadian steelmaking operations in several locations, basically Hamilton Ontario at the far Western end of Lake Ontario, and Algoma Steel up in the Soo, or Sault Ste. Marie area.  The Hamilton plants are very old, the legacy operations in Canada, and today two plants, "Stelco II," and "Dofasco II," remain and run nicely.  There was a third mill but that is now gone.  Stelco II  (my designation) is the Steel Co. of Canada, and that was owned by US Steel, went bankrupt, recapitalized along with the remnants of the US operations out of that bankruptcy, and is now pretty much owned by the Americans, as I understand it.  Half that production output goes to the USA as hot rolled steel coiled for use by US automakers in their stamping plants.  It is a specialty steel and cannot be easily replaced so right now the US customers have to "eat" the duty, because these supply chains are so integrated. Heavy plate steel will I expect largely go over to the plate mills located in Alabama and Mississippi, so they benefit from the tariff.   More in the next post on this long saga. 

Now that is the kind of information I'm talking about.  Do tell more, Jan!

[Jan van Eck + 7,558]

Steel Saga, Part III  (retaliatory tariffs)

So you have seen how The Donald has whacked the traditional shippers of steel and aluminum into the USA. with hefty tariffs. All kinds of people, politicians and talking heads, expected these to be lifted once new trade deals were structured.  No chance.  Donald is perfectly serious about this, and good thing or bad thing, this is the New Normal.  Until he leaves office, you will see these tariffs.

For the Canadians, this is the second Big Whack.  The Canadians have traditionally held some 1/3 or more of the total US softwood dimensional lumber business, and those exports supported a host of small towns in the Northern hinterlands of B.C., New Brunswick, and Quebec.  THe US already whacked that business with both tariffs and a quota, where the tariff I think is about 12% and the quota is the most hurtful.  What this does is shift production to the Southeast USA, where timber farms operate.  That has protected the US operators with a larger market share and better pricing, and the treasury does not pick up much more as the Canadian export business is collapsing.  But it does put entire towns in Canada out of work, and is catastrophic, so again that enrages the Canadians.  It also put up homebuilding costs in the Northern USA, the traditional markets for Canadian building lumber, up by $10-20,000 per house, so it is hitting homebuyers. 

So the response of the trading partners is to try to hit back, and they have been levying tariffs on selected US exports, precisely calculated to hit Trump and the Republicans in districts where they need votos.  So you see the hit on Harley Davidson precisely because Milwaukie sits in the backyard (and voting district) of Paul Ryan and Governor Walker, the Republican heavyweights. Florida orange juice gets hit because Florida is a swing State in the national elections and causing Florida voters grief because of Trump will presumably motivate Floridians to vote Democratic inthe next election round.  Vermont maple syrup gets hit because Bernie Sanders is this influential Independent Senator and can be expected to yowl in pain  (which happened).  Trump's response is to threaten 25% tariffs on Canadian and Mexican auto producers, and that will Really, Really hurt as some 12% or 15% of Canadian GNP is in auto building and parts manufacturing.  So at this point Justin Trudeau is hunkering down and saying nothing, his last boradside about Canadians not going to take it, after the G-7,  having led to a puerile twitter outburst from Trump threatening even more and more tariffs  (which would turn Canada into Greece, incidentally).

The real problem is that Trump is this loose cannon who has gotten drunk on power, and is doing totally crazy things.  WIll the USA survive?  Probably.  Will the Allies?  Probably not.  They are going to see their economies fall into Depression. Coming soon, to a theater near you.

Back to Harley:  Harley faces a demographic in the USA that is not buying its big road-cruiser bikes.  The last segments of the baby boomers are aging out of bikes, the grey-hairs, so where are the customers?  THey have been developing an interesting customer base in Europe, and will continue to do so in Eastern Europe, where motorcycles have traditionally been used for personal transport. But their bikes are pricey - double the cost of the 1-liter Indian motorcycle built in Iowa.  So that exgtra 25% tariff, and then the 17% VAT tax on the new higher balance, really hurts them.  Harley had already set up a plant in Thailand, and somewhere else I think, so the production destined for Europe is shifted to those plants.  I do not hear that Harley is actually building a plant "in Europe;" rather, they are shifting that production traditionally done in Milwaukie, Wisconsin to the plants in Thailand, and shipping the finished bikes from Thailand to Europe, thus avoiding the tariff wall. 

And that is exactly the result that the E.U. was looking for - whack The Donald, but not necessarily disrupt internal markets. 

You can expect a lot more of this, and it will go in unexpected ways, because the guys that surround The Donald are seriously stupid.  And arrogant. and very, very self-righteous.  And have no sense of humor  (neither does The Boss).  It will get worse.

[Dan Warnick + 6,100]

Jan, can you go into more detail as to what it actually means when it is said that a country is "dumping" and what, if anything, can be done about it?  I mean, the term "dumping" seems to mean that those countries are flooding the U.S. with cheaper product that others cannot compete with, but I'd like to know the details of how this is so.  Back to tariffs: are tariffs the only measure that can counter dumping?  If dumping is effectively countered by tariffs, are there companies in the U.S. that can pick up the slack?  If I understand what you wrote above about the state of mills in the U.S., it would seem the answer is No.  If that is true, then it would seem the whole issue is headline grabbing, since tariffs would only seem to penalize BOTH sides of the equation.

[Ian Austin + 131]

12 minutes ago, Jan van Eck said:

Steel Saga, Part III  (retaliatory tariffs)

So you have seen how The Donald has whacked the traditional shippers of steel and aluminum into the USA. with hefty tariffs. All kinds of people, politicians and talking heads, expected these to be lifted once new trade deals were structured.  No chance.  Donald is perfectly serious about this, and good thing or bad thing, this is the New Normal.  Until he leaves office, you will see these tariffs.

For the Canadians, this is the second Big Whack.  The Canadians have traditionally held some 1/3 or more of the total US softwood dimensional lumber business, and those exports supported a host of small towns in the Northern hinterlands of B.C., New Brunswick, and Quebec.  THe US already whacked that business with both tariffs and a quota, where the tariff I think is about 12% and the quota is the most hurtful.  What this does is shift production to the Southeast USA, where timber farms operate.  That has protected the US operators with a larger market share and better pricing, and the treasury does not pick up much more as the Canadian export business is collapsing.  But it does put entire towns in Canada out of work, and is catastrophic, so again that enrages the Canadians.  It also put up homebuilding costs in the Northern USA, the traditional markets for Canadian building lumber, up by $10-20,000 per house, so it is hitting homebuyers. 

So the response of the trading partners is to try to hit back, and they have been levying tariffs on selected US exports, precisely calculated to hit Trump and the Republicans in districts where they need votos.  So you see the hit on Harley Davidson precisely because Milwaukie sits in the backyard (and voting district) of Paul Ryan and Governor Walker, the Republican heavyweights. Florida orange juice gets hit because Florida is a swing State in the national elections and causing Florida voters grief because of Trump will presumably motivate Floridians to vote Democratic inthe next election round.  Vermont maple syrup gets hit because Bernie Sanders is this influential Independent Senator and can be expected to yowl in pain  (which happened).  Trump's response is to threaten 25% tariffs on Canadian and Mexican auto producers, and that will Really, Really hurt as some 12% or 15% of Canadian GNP is in auto building and parts manufacturing.  So at this point Justin Trudeau is hunkering down and saying nothing, his last boradside about Canadians not going to take it, after the G-7,  having led to a puerile twitter outburst from Trump threatening even more and more tariffs  (which would turn Canada into Greece, incidentally).

The real problem is that Trump is this loose cannon who has gotten drunk on power, and is doing totally crazy things.  WIll the USA survive?  Probably.  Will the Allies?  Probably not.  They are going to see their economies fall into Depression. Coming soon, to a theater near you.

Back to Harley:  Harley faces a demographic in the USA that is not buying its big road-cruiser bikes.  The last segments of the baby boomers are aging out of bikes, the grey-hairs, so where are the customers?  THey have been developing an interesting customer base in Europe, and will continue to do so in Eastern Europe, where motorcycles have traditionally been used for personal transport. But their bikes are pricey - double the cost of the 1-liter Indian motorcycle built in Iowa.  So that exgtra 25% tariff, and then the 17% VAT tax on the new higher balance, really hurts them.  Harley had already set up a plant in Thailand, and somewhere else I think, so the production destined for Europe is shifted to those plants.  I do not hear that Harley is actually building a plant "in Europe;" rather, they are shifting that production traditionally done in Milwaukie, Wisconsin to the plants in Thailand, and shipping the finished bikes from Thailand to Europe, thus avoiding the tariff wall. 

And that is exactly the result that the E.U. was looking for - whack The Donald, but not necessarily disrupt internal markets. 

You can expect a lot more of this, and it will go in unexpected ways, because the guys that surround The Donald are seriously stupid.  And arrogant. and very, very self-righteous.  And have no sense of humor  (neither does The Boss).  It will get worse.

This is fascinating stuff. Reading it makes me wonder whether The Donald is actually trying to start a World War. 

Keep em’ coming 

[Dan Warnick + 6,100]

12 minutes ago, Jan van Eck said:

So that extra 25% tariff, and then the 17% VAT tax on the new higher balance, really hurts them.

Can you clarify?  Does that line mean tariff and VAT imposed by Europe?

[Jan van Eck + 7,558]

On 6/30/2018 at 7:42 PM, Dan Warnick said:

Jan, can you go into more detail as to what it actually means when it is said that a country is "dumping" and what, if anything, can be done about it?  I mean, the term "dumping" seems to mean that those countries are flooding the U.S. with cheaper product that others cannot compete with, but I'd like to know the details of how this is so.  Back to tariffs: are tariffs the only measure that can counter dumping?  If dumping is effectively countered by tariffs, are there companies in the U.S. that can pick up the slack?  If I understand what you wrote above about the state of mills in the U.S., it would seem the answer is No.  If that is true, then it would seem the whole issue is headline grabbing, since tariffs would only seem to penalize BOTH sides of the equation.

Dan, I am not the world expert on tariffs, or the Chinese, or anything else. Taking that caveat, "dumping" is where product (typically excess production that has no home) gets exported and sold abroad for less than the cost of manufacture, just to get rid of it. "Dumping" is an official status declaration, and has its own formulae, and in aircraft manufacture will include the various grants and subsidies issued by the home country to the builder. YOu will recall the big spat over the Bombardier "C-Series" aircraft, where Boeing brought a complaint to the US Commerce Dept, and Bombardier got whacked with a 287% duty. That led to more lawsuits, Bombardier sold the product to Airbus, and now both companies will build those planes.  And that was about a $6 Billion subsidy.  Oh, well. 

Steel gets "dumped" when the local mill is putting out far more product than their traditional markets can absorb, so to avoid having to shut down the plant, the excess production is sold wherever the sales force can find a customer, and at a price so low that the customer jumps ship from whoever is their current supplier.  So if China or Europe goes and dumps steel into the US, they are displacing somebody else.  This is part of what led to the collapse of the USA steel industry (the other part being the problems with union contracts that got out of hand). 

You can deal with dumping by either a tariff, or a quota.  The quota can be Zero.  For example, at one point the Canadians had a zero quota on used cars from the USA.  What was happening was that Canada was placing vast amounts of road salt on the roads, it was rotting out the local cars, so entrepreneurs would go down to Florida and Georgia and buy up these used cars at the auctions, truck them to Canada, and sell rust-free cars in  competition with the trade-ins at the dealers, which were all rusting. So after the usual political pressure from the powerful Dealers Association, the govt did a zero quota, or absolute ban, on used cars. You could not even buy your own in the USA and drive ti back, forget about the plates, you could not get it over the Border!  

Demping can also be done on the sly, by manipulating the exchange rates.  When a country does that (China being the biggest offender) the product is artificially priced lower, so that it can and will run the target country's producers out of business.  And you have seen that in everything from brass valves, bar, sheet, tube, and machined parts to clothing and toys.  WalMart alone imports some $60 Billion of stuff from China, is the single biggest importer, and had dumped their US suppliers in everything from tents to bicycles.  And the US plants go under in the onslaught. 

You can deal with it with both tariffs and quota, and with outright bans.  You can even go so far as to go to war, which is what used to happen.  Remember that the US revolution was fought in large part over these issues with England. 

In the steel industry, there is some room in there for new US production.  I think an idled plant in either East Chicago or in Gary, Indiana has been started back up to make hot-rolled steel.  The stuff is for bridge girders, that sort of thing, formerly supplied by Algoma Steel in Canada  (and they are not too happy).  Nobody is going to commit hundreds of millions on a new facility when if The Donald drops the tariffs the new mill instantly has no market.  And since The Donald has no credibility in business circles, nothing much happens. But the US Treasury does pick up extra dollars, to go spend on war materiel. 

Bottom line: the old ways of doing things are being roiled, with all the attention focused on The DOnald.  And he likes it that way, so you can expect more of the same.  Expect markets to be disrupted.  Expensive?  But of course. 

Edited July 2, 2018 by Jan van Eck
typing error

[Jan van Eck + 7,558]

17 minutes ago, Dan Warnick said:

Can you clarify?  Does that line mean tariff and VAT imposed by Europe?

Sorry, you guys that are not Europeans or Canadians - VAT stands for Value Added Tax, a wierd tax on goods and services tacked on to whatever the final invoice price is.  It is typically instead of a Sales Tax.  It is a poor instrument of taxation, tends to fall heavily on poorer folks, and also discriminates against small manufacturers, thus depressing the entrepreneurial sector in favor of the vertically-integrated manufacturer.  YOu see it in these countries influenced as colonies of the old European Powers. 

What the Europeans do is first levy a tariff, so that bumps up the price by say 25% "at the dock."  Now the distributor sells it forward, and the final buyer then pays the VAT on both the manufacturer's price AND the tariff, so it is 17% on top of 25%. It stacks up the retail price.  You get that all over Europe. It is a stealth way of financing socialism, and I say that with detachment, it is what it is.  

[Jan van Eck + 7,558]

26 minutes ago, Ian Austin said:

This is fascinating stuff. Reading it makes me wonder whether The Donald is actually trying to start a World War. 

Keep em’ coming 

Donald is not very bright.  He has certain instincts when it comes to both politics and real estate, for the rest it is a bust.  He is not trying to start a world war, he is trying to hurt the Europeans  (notwithstanding his long list of European brides, as the domestic versions declined).  Besides, there is nobody out there that could even begin to challenge the US military.  There is one superpower, and everybody else is a nobody.  The US can do as it pleases, and with The Donald, it does.  So you can expect irrational behavior, and the rest of the world has to put up with it. 

Edited July 1, 2018 by Jan van Eck
typing error

[Jan van Eck + 7,558]

I expect twenty upvotes for having held class, gotta keep up my contest with Tom Kirkman.  The computer has whacked me for over 50 points, so I am losing ground fast! The Hunchback of Notre Dame is inside the Leaderboard computer, and it doesn't like me, so I face its wrath.....

[Dan Warnick + 6,100]

3 minutes ago, Jan van Eck said:

I expect twenty upvotes for having held class, gotta keep up my contest with Tom Kirkman.  The computer has whacked me for over 50 points, so I am losing ground fast! The Hunchback of Notre Dame is inside the Leaderboard computer, and it doesn't like me, so I face its wrath.....

Very much appreciated, Jan.  Thank you.

[Jan van Eck + 7,558]

14 minutes ago, Dan Warnick said:

Very much appreciated, Jan.  Thank you.

See, you fellows granted me 11 upvotes, as of 2035 EDT, and the Leaderboard registered only one tick.  That internal software code is seriously screwed up.  I anticipate it will now register 10 downgrades in the next 90 minutes, if it keeps up to form.  Amazing. 

And that is why I so dislike "fly by wire" computer systems on aircraft.  Instead of mechanical link between the pilot yoke and the control surface, you have this software code talking aback and forth, and with all the lines of code in there, it is ripe for some catastrophic "bug" to let loose at the worst possible moment.  I get pooh-poohed when I say this, but remember, that military design does not account for the harsh fact that the passengers on some airliner do not have ejection seats, so no way to bail out when it all goes South.  Just sayin'. 

[Jan van Eck + 7,558]

Just now, Jan van Eck said:

See, you fellows granted me 11 upvotes, as of 2035 EDT, and the Leaderboard registered only one tick.  That internal software code is seriously screwed up.  I anticipate it will now register 10 downgrades in the next 90 minutes, if it keeps up to form.  Amazing. 

 

And Tom just got whacked for 20 points for doing nothing, he went from 223 to 203 in the last five minutes!  Amazing. 

[Dan Warnick + 6,100]

1 hour ago, Jan van Eck said:

See, you fellows granted me 11 upvotes, as of 2035 EDT, and the Leaderboard registered only one tick.  That internal software code is seriously screwed up.  I anticipate it will now register 10 downgrades in the next 90 minutes, if it keeps up to form.  Amazing. 

And that is why I so dislike "fly by wire" computer systems on aircraft.  Instead of mechanical link between the pilot yoke and the control surface, you have this software code talking aback and forth, and with all the lines of code in there, it is ripe for some catastrophic "bug" to let loose at the worst possible moment.  I get pooh-poohed when I say this, but remember, that military design does not account for the harsh fact that the passengers on some airliner do not have ejection seats, so no way to bail out when it all goes South.  Just sayin'. 

Aha!  Now you have started talking about things that are my bailiwick (aviation).  I quite agree with your preference to mechanical systems, at least when it applies to controlling an aircraft.  Here is a link to a pretty good basic description of both systems and the pros and cons of each:

http://www.43airschool.com/blog/posts/the-difference-between-a-boeing-and-an-airbus-s-control-systems

 

 

[Jan van Eck + 7,558]

Tariffs, Part IV  -  the Canadian milk tariff barriers of 270%

Continuing in our vein of dissecting the current fiasco of tariffs between equal value nations, specifically the USA and Canada, I would explore the now-infamous "milk tariff" of 270% that The Donald harped on, and its implications for both oil and gas trading. You will all recall Donald going berserk over the Canadian milk tariff.  Is there such a thing? Yup, sure is.  Is it some catastrophe for the USA and its milk producers?  Nope, is not.  Herewith the tale:

Canada practices what is known as "supply management" in milk products.  What Ottawa (Federal Govt) does is artificially limit the amount of milk products produced, the idea being that supply scarcity will keep prices up so that price supports from the taxpayers (as you have in the USA) will not be needed.  the immediate result of the so-called "supply management" is that each Canadian family pays a big premium for milk, calculated to be around $278/year.  what Canada gets for that is stability and some prosperity in the areas of dairy operations, principally in eastern Ontario and Quebec, which are strongholds of the Liberal Party and provide a rich harvest of Ridings and Members of Parliament to support the government and keep the Conservatives at bay.  That is a raw political calculation and it seems to have worked. 

But it would totally collapse if US dairy were allowed free access.  US Dairy flows from massive operations, some as high as 50,000 cows, and you are not going to compete with that with some little Quebec milk deal with 45 cows. So Canada has kept those guys out with that tariff wall. Does any of this really matter to the Americans?  Of course not; the entire country is too small to have any real impact on US production, sales, or farmer prosperity. 

Meanwhile, what is not told is that the US dairy industry already has "some" duty-free access to Canadian markets.  THat amount is not insignificant, and while I have zero figures, I speculate that it allows for Manitoba to get milk cheap from Wisconsin. Could the Wisconsin guys also take over the Metro Toronto market in Ontario?  Probably not; first, there is the freight costs to figure out, which are substantial compared to Eastern Ontario, and then the Canadian Dollar trades at this hefty discount, chopping another 20-25% off the receipts. So the reality is that the US guys are not really losing anything because of that 270% duty, they don't have the ability to exploit those markets unless they want to take a hit and are dumping surplus product  (which they might want to do, but that is far from certain). 

The Canadians have historically relied on some form of market intervention, by supply controls, to maintain their Ag sector.  In the past, grain crops were all sold to the Canadian Wheat Board, a govt monopoly, and if you were say Russia or China you would make your purchase transaction with the Wheat Board at the price the Board set.  That assured the grower of a decent price, and stabilized the ag sector as to grains. It meant the govt occasionally would be paying for silo storage if there was a bumper crop they could not immediately sell, but such is life.  The taxpayers have lots of coin.  All that got dismantled perhaps 25 years ago by the Conservatives, but that is another story. 

Having brazenly inserted themselves into pricing and supply, the Cdn govt hardly views some crates of milk to be a big deal, and is shocked by Donald's aggressive attacks.  I think the Donald is playing politics, it has no serious impact (to the USA), yet it is causing serious problems with the Canadians.  Is that smart?  Probably not. The bad vibes are causing a greater loss in tourist dollars than could ever be made up for selling some milk in Winnipeg. Moral:  don't go running around antagonizing your customer, it is bad for business. And they don't teach that at the Wharton School, you have to figure that out when you are in the trenches.  Cheers.

Edited July 2, 2018 by Jan van Eck
scrivener error

[Dan Warnick + 6,100]

10 hours ago, Jan van Eck said:

Tariffs, Part IV  -  the Canadian milk tariff barriers of 270%

Continuing in our vein of dissecting the current fiasco of tariffs between equal value nations, specifically the USA and Canada, I would explore the now-infamous "milk tariff" of 270% that The Donald harped on, and its implications for both oil and gas trading. You will all recall Donald going berserk over the Canadian milk tariff.  Is there such a thing? Yup, sure is.  Is it some catastrophe for the USA and its milk producers?  Nope, is not.  Herewith the tale:

Canada practices what is known as "supply management" in milk products.  What Ottawa (Federal Govt) does is artificially limit the amount of milk products produced, the idea being that supply scarcity will keep prices up so that price supports from the taxpayers (as you have in the USA) will not be needed.  the immediate result of the so-called "supply management" is that each Canadian family pays a big premium for milk, calculated to be around $278/year.  what Canada gets for that is stability and some prosperity in the areas of dairy operations, principally in eastern Ontario and Quebec, which are strongholds of the Liberal Party and provide a rich harvest of Ridings and Members of Parliament to support the government and keep the Conservatives at bay.  That is a raw political calculation and it seems to have worked. 

But it would totally collapse if US dairy were allowed free access.  US Dairy flows from massive operations, some as high as 50,000 cows, and you are not going to compete with that with some little Quebec milk deal with 45 cows. So Canada has kept those guys out with that tariff wall. Does any of this really matter to the Americans?  Of course not; the entire country is too small to have any real impact on US production, sales, or farmer prosperity. 

Meanwhile, what is not told is that the US dairy industry already has "some" duty-free access to Canadian markets.  THat amount is not insignificant, and while I have zero figures, I speculate that it allows for Manitoba to get milk cheap from Wisconsin. Could the Wisconsin guys also take over the Metro Toronto market in Ontario?  Probably not; first, there is the freight costs to figure out, which are substantial compared to Eastern Ontario, and then the Canadian Dollar trades at this hefty discount, chopping another 20-25% off the receipts. So the reality is that the US guys are not really losing anything because of that 270% duty, they don't have the ability to exploit those markets unless they want to take a hit and are dumping surplus product  (which they might want to do, but that is far from certain). 

The Canadians have historically relied on some form of market intervention, by supply controls, to maintain their Ag sector.  In the past, grain crops were all sold to the Canadian Wheat Board, a govt monopoly, and if you were say Russia or China you would make your purchase transaction with the Wheat Board at the price the Board set.  That assured the grower of a decent price, and stabilized the ag sector as to grains. It meant the govt occasionally would be paying for silo storage if there was a bumper crop they could not immediately sell, but such is life.  The taxpayers have lots of coin.  All that got dismantled perhaps 25 years ago by the Conservatives, but that is another story. 

Having braxenly inserted themselves into pricing and supply, the Cdn govt hardly vies some crates of milk to be a big deal, and is shocked by Donald's aggressive attacks.  I think the Donald is playing politics, it has no serious impact (to the USA), yet it is causing serious problems with the Canadians.  Is that smart?  Probably not. The bad vibes are causing a greater loss in tourist dollars than could ever be made up for selling some milk in Winnipeg. Moral:  don't go running around antagonizing your customer, it is bad for business. And they don't teach that at the Wharton School, you have to figure that out when you are in the trenches.  Cheers.

I thought that was the case, but it is very nice indeed to have it spelled out.  Thanks, Jan.

[Jan van Eck + 7,558]

On 6/30/2018 at 7:42 PM, Dan Warnick said:

Jan, can you go into more detail as to what it actually means when it is said that a country is "dumping" and what, if anything, can be done about it?  I mean, the term "dumping" seems to mean that those countries are flooding the U.S. with cheaper product that others cannot compete with, but I'd like to know the details of how this is so.  Back to tariffs: are tariffs the only measure that can counter dumping?  If dumping is effectively countered by tariffs, are there companies in the U.S. that can pick up the slack?  If I understand what you wrote above about the state of mills in the U.S., it would seem the answer is No.  If that is true, then it would seem the whole issue is headline grabbing, since tariffs would only seem to penalize BOTH sides of the equation.

With respect to the specifics of the steel tariffs, China and Acelor-Mittal Steel (owned by India, plants in India, all around Europe, even one US plant)  are the chronic, worst offenders in dumping.  ArcelorMittal bought the old Dofasco Steel plant in Hamilton, ONtario, out of the bankruptcy courts, spruced it up, and now dumps Canadian steel into the USA.  Dofasco stands for "Dominion Foundries and Steel Co.," the first producer of steel in Hamilton.  Aside from the curious case of Dofasco, ArcelorMittal is now the world's largest integrated steel producer as one company, but I think China has even greater capacity.  And yes, in the specific case of steel, tariffs, "if" they are applied and remain consistently in place, will act as a shield, which is why they are used. 

Going a bit further, let up look at the underlying issues.  If a country is dumping, and the countries are both members of  WTO, the World Trade Organization, then a Dumping complaint can be levied, and if WHO investigators agree, you get a stop Order from WTO and the complainant can impose hefty tariffs, even ban the import of that product completely.  The most spectacular case of tariffs to ban a product was the US treatment of Bombardier attempting to sell its new "C"-series aircraft to United Airlines, which Boeing (wrongly) objected to, and that led to roughly a 300% tariff, effectively a shutdown of sales.  But that was just sour grapes by Boeing, and got defeated.

The reason you have these issues is laid at the feet of Milton Friedman, who was (might still be) an economist at the University of Chicago.  Friedman is this loony figure who has dominated American economic thinking at the academic level and that has percolated into Washington with Reagan  (might go back to Nixon).  The Friedman crowd has this idea of "comparative advantage," which is that each country undertakes production of goods that it excels at, and then the two countries trade, so everybody is better off.  And like all ideas from these academic types, it sounds nice, but falls apart in practice. 

The problem is that there rarely is a true comparative advantage.  Ironically, the two countries where it might be most likely to evolve are the USA and Canada, because the systems and wage levels are so similar.  But if you take the USA and China or Vietnam, you never have comparative advantage, you instead have absolute advantage, where China has such depressed wage levels, no OSHA, no environmental regulations, that no US producer can compete in anything.  If you make it in the USA, then the Chinese can take the entire world market away from you and everybody else if there are no trade barriers and they have an absolute advantage.  And that is precisely why China is a chronic manipulator of currency exchange rates, they need to prevent their currency from rising and chipping away at that comparative advantage. 

And the solution, if you don't like it, is to refuse to buy anything made in China.  If you go (here in the Northeast) to the Raymour & Flanagan furniture store, which is upscale enough, you are shown sofas and bedroom sets made in the Carolinas, in Italy  (the Natuzzi brand), and in China.  The sales people will tell you the Chinese stuff is superior, put together better.  Might be true, but that is not helpful to the trade deficit.  If you are a true-blue patriot, you can buy the Carolinas stuff.  Personally I buy Italian and I like their leather, and I have no problem with trading with a country that is developed on lines similar to the "West":  North America and Europe.  And if you want to save a few bucks you have the Chinese stuff.  Remember that the single largest importer of goods into the USA from China is WalMart, to the tune of $60 billion. 

At one time I was looking at electric lawnmowers sold by an outfit with a name vaguely similar to GreenWorks.  I could see that the various plastic parts were inferior, so I contacted them and made inquiries.  The machines, with electric batteries, are all made in China, and all the company does is import and sell them.  So, I inquired if they would like to have a US supplier.  I was flatly turned down.  Now, I know that a US plant can make a better, sturdier product with better quality moldings.  But what has happened is that those guys have developed a business model where US fabricators are not considered.  That attitude is again not helpful.  (If I don't like it, I can set up a parallel production line and go compete with them, assuming that the capital is available, which it probably is not.) 

Now if you multiply the lawnmower experience and the furniture experience through the vast range of products including industrial goods, you begin to see the magnitude of the problem.  Keep in mind that this was all Nixon's doing; he sent Kissinger over to deal with the Communists after Lyndon Johnson decided to crank up that Vietnam war.  He aroused an implacable, warlike China which also had nuclear bombs, and which had this history of threatening its neighbors, invading and seizing Tibet and the entire Mongol Plateau, shooting up the Indian Army, and shelling the little outpost islands of Quemoy and Matsu that the Nationalist Chinese (now Taiwan) were sitting on, just off the mainland shore.  So you have this aggressive and unstable Communist war country and how to deal with it?  And Nixon and Kissinger, through "ping pong diplomacy," opened China up to the possibility of selling goods to the West instead of shooting at Quemoy, and guess what, now China is the manufacturing center of the planet. Was that a good idea?  Well, it toned down the shooting, and war is a major threat.  But the USA paid a huge price, with at least 50,000 factories closed and millions put out of work. 

Can you contain the Chinese today?  Sure; but it is up to the individual consumer to do that.  Are Americans prepared to give up buying CHinese stuff?  Nope. Those ideas of "patriotism" and America First are only good for Hot Dog Day, coming up fast on a calendar near you.

Edited July 2, 2018 by Jan van Eck
added "from China" to the reference to WalMart imports

[Jan van Eck + 7,558]

1 hour ago, mthebold said:

At first glance, it appears foreign countries can manipulate the US at low cost.  Losing large swathes of industry because swing states have political leverage doesn't seem wise.  Should we be concerned about that?  If so, does Trump's strategy address the problem, even if at some cost to "allies"?

Well, you are getting to the nub of the issues, and that is the adoption of "Policy."  And (obviously) I don't make Policy, the Congress and the Administration do. I don't think it is fair to say that foreign companies manipulate the USA.  If you have countries with roughly equal development, and that is most of Western Europe, including as far East as Finland, and The USA, Canada, Japan, and possibly Taiwan, and toss in Australia and New Zealand, then you have a cluster of countries with roughly equal development (and thus cost basis) and so there is no logical reason why trade between them would not be done both duty-free and with comparative advantage developing.  For example, the USa ships beef to Japan and we take autos back in trade.  Works fine. Canada ships us lumber and autos and furniture from Quebec and subway cars from Port Arthur, Ontario, and we sell them pleasure boats and outboard motors and lawnmowers and Kentucky bourbon and Florida orange juice.  Works fine  (until Trump got in the way).  No rational person objects to free trade with Canada  (OK, some Canadians might, but that is their story). 

But there is nothing that comes out of Africa, for example, that would be an example of comparative advantage, unless you are looking at some specialty good such as diamonds  (De Beers) and African Mahogany. Africa only contributes 2% of the world GDP. 

Can you trade on comparative advantage with Brasil?  Nope; they have a cost basis that cannot be competed with.  So again, that deteriorates into an absolute advantage, and you see that with the Embraer line of commercial aircraft. so as long as you have free trade with Brasil, you give up the commuter aircraft segment. Cannot be built competitively in the US.  See the problems?

Now, does trump's strategy address the problem?  Broad answer: No.  That is because Trump does not understand the nuances, and has no interest in doing so.  He is stuck in his own thought pattern, which does not coincide with reality.  That said, I remind readers that the Clintonites would have been worse.  Hard to believe, but all true.  Be happy she did not win that election.  And that points to the abysmal failures of the dominant US political powers to develop serious candidates, people who actually know what they are doing. You don't see that in Washington. 

Edited July 2, 2018 by Jan van Eck
typing error

[Jan van Eck + 7,558]

On 6/30/2018 at 8:19 PM, Dan Warnick said:

Very much appreciated, Jan.  Thank you.

I am and remain a shameless self-promoter.  Think of me as one of those carnival barkers selling miracle elixir.  Don't be surprised if your hair falls out!

[spiritdawg + 1]

Like the pro-life generation's lack of historical reference about outlawing abortion, World War II is so far from our conscience, we forget the main reason Japan entered the war against the United States.

I agree with recent analysis that the United States is headed toward World War III with China.  The issue is still trade.  Again and especially, oil.

This time, the US have overplayed their hand.   

[spiritdawg + 1]

From:  http://money.cnn.com/2018/05/22/news/economy/china-cuts-car-tariffs-imports/index.html

"The Chinese Finance Ministry said Tuesday that it will cut import duties on passenger vehicles from 25% to 15%, starting July 1.

Germany's Porsche (POAHF) reacted quickly to China's announcement, saying on Tuesday it "welcomes the tariff reduction policy" and would consider lowering its prices for the Chinese market.

"Chinese customers will have [the] chance to enjoy an even [more] optimized price and pursue more personalized options when buying a car," it said in a written statement.

Others that stand to gain are high-end brands that ship expensive cars to China, such as BMW(BMWYY) and Mercedes-Benz (DMLRY), Russo said.

The gains for big US automakers like GM (GM) and Ford (F) are likely to be more limited. The lion's share of the cars they sell to Chinese consumers are already manufactured inside China.

The United States has been increasing its auto exports to China, though, despite the heavy duties. It sent $10.5 billion of cars -- new and used -- to China last year, up from $8.8 billion in 2016"

That last sentence highlights the insanity of the Trump tariffs.  United States auto exports to China increased 15.8% from 2016-2017. 

It's the same insanity as the "bringing back jobs from overseas" argument, while bragging about record low unemployment.

 

 

[Eric Smith + 11]

As an unreconstructed globalist, I believe that tariffs and quotas are both bad ideas and I suspect the majority of economic historians agree with me. The reasons for instituting either solution are all about protecting workers/companies which can't compete in the world market for whatever product is in question. In the short term, say one to two years, they work. However, in the intermediate term, they simply create opportunities for end runs and a thriving black market for the product in question. My favorite example was the effort, during the Eisenhower administration, to protect high cost oil producers in Texas from the inroads of low cost oil production in Venezuela and Saudi Arabia. The government instituted import tariffs plus import quotas on the offending imports. The short term result was a diminution in the producing countries' GDP of ~43% in one year. The longer term effect was the creation of OPEC by the two leaders being Venezuela and Saudi Arabia. I might add that the Majors were against the idea from the start, demonstrating their sound economic analysis, their self interest in gowing imports, and a collective "tin ear" concerning the will of voters and campaign contributors.

One final bit of irony, the partner from Venezuela was a former employee of the Texas Railroad Commission, the godfather of a US based cartel that pre-dated the founding of OPEC. It was enforced by the Texas National Guard.

What does this have to do with the current debate about tariffs you ask? I defer to Mark Twain who famously remarked..."history doesn't repeat itself, but it certainly rhymes a lot.."

[Jan van Eck + 7,558]

5 hours ago, mthebold said:

If you have time, I'd love to hear more about the nuances.  What complications do you see, and what policies would accommodate them? 

Well, let's take a really basic item, fresh water.  Now in the Northeast USA and of course all of Quebec and all of the areas away from the big industrial and population centers in the South of Canada, fresh water is plentiful, no worries, you have all you can drink and then some. Go into the West of the USA and the Southwest and down into the high desert and water is the most constrained resource on the plate.  There is never enough.  So at one time there was this idea of building a pipeline from the Great Lakes, and even from the Upper Snake River and rivers that flowed into Canada, to run down to the US Southwest and LA and bring in vast amounts of water.  Is this a good idea?  Probably is, especially if you can fill up and thus reclaim Owens Lake. 

OK now along comes Trump and hits Canadian Steel with a 25% tariff.  Overnight, steel-intensive projects such as oil rigs get more expensive.  But what about the pipelines - including the big water pipeline?  It turns out that a really big fabricator of specialty pipeline sections is a steel mill located in the sleepy town of Regina, which is the Provincial Capital of Saskatchewan  (located between Manitoba and Alberta out in the Canadian West, for those of you who never heard of the place, and don't feel bad, neither has anybody in next-door USA). Sitting in Regina is the EVRAZ Steel Co., and I invite readers to check it out here:
http://www.pipelinenews.ca/news/local-news/evraz-announces-200-million-pipe-mill-expansion-in-regina-1.1811500

To quote about EVRAZ:     Large diameter line pipe is integral to oil and natural gas distribution, and EVRAZ has produced more than 51,000 kilometres (32,000 miles) of project pipe from millions of tons of recycled metal over its 59 years in Regina. The Regina site and its employees currently contribute about $30 million per year to the federal and provincial economy in direct taxes. EVRAZ also creates another $600 million per year in economic benefit through the purchase of raw materials, goods and services.  

OK, so here is this Continent-wide leading source of large-diameter pipe.  And Trump goes and whacks it with a 25% tariff.  So, if you are going to go build yourself a massive water pipe project to bring water to the US Southwest, where are you going to go buy the pipe?  And I have news for you: you are going to Canada for it.  But now that pipe is 25% more expensive and you don't have the cash for it, so there goes the project.  

And you get the same situation in the oilpatch.  The pipe to get the pumped oil off the Permian and off the Dakotas comes out of a pipe mill, not from Mars, and if you want new pipe in Wyoming or North Dakota or even Texas, the Canadian mill is the logical choice.  But now you need a few extra millions for the job, so where is the money for the new pipelines for gas, for oil, for water, for anything?  

And Trump does not see that.  The US and Canada has this intricate web of relationships for sourcing industrial goods and for selling retail including foods and consumer goods.  Along comes Mr. Trump and he tosses a sledgehammer at it all. Well, guess what, then you have a big mess.