Tariff Wars and Manufacturing Jobs

So much has been written about the tariff wars Trump has unleashed. A lot of it is just Trump-bashing. Others obsess over the impact on the “great” US alliance with Europe and Canada. Which is why I found Ben Thompson’s take so refreshing – it was mostly about the country that really matters in all this, China. And equally, why America cannot move manufacturing to itself.

 

First, the US/West thinks of manufacturing the way it used to be, i.e., before China changed manufacturing altogether. He explains what he means by that. The one-word answer? Scale. Aka quantities. The more one manufactures, the more the efficiencies of scale, which reduces costs, that then increases affordability and thus demand. The more money there is to be made, the more the factories invest to optimize things. China has been in this virtuous cycle mode for decades. To imagine that the US (or West) can come to that level of manufacturing efficiency and skills any time soon is just impossible.

“This helps explain why manufacturing in Asia is fundamentally different than the manufacturing we remember in the United States decades ago.”

 

Second, when it comes to semiconductor chips, he points out that the cost of switching to newer tech to support smaller node sizes (size of each transistor) is “astronomical”.

“The best way to afford those costs is to have one entity making chips for everyone, and that has turned out to be TSMC (Taiwanese).”

Trying to move that capability to the US, the way Biden and now Trump are trying, is tough. The manufacturing experts are in Taiwan, the trained labour for that is in Taiwan, and the labour wages in Taiwan are lower. Even if you could somehow move all that to the US, the price of chips would go up, after which the end to end impact (will demand fall? By how much? Which industries would be hit the most? Which countries?) is impossible to predict.

 

Third, as an example, take those iPhone manufacturing jobs in China.

“Every single job in this country (US) makes much more money than an iPhone factory line worker.”

So who in the US would want such a job? The alternatives matter:

“It’s a good job if the alternative is working in the fields or in a much more dangerous and uncomfortable factory, but it’s much worse than basically any sort of job that is available in the U.S. market.”

This took the iPhone as an example, but the same point applies across products. Even more so for low-cost products where labour cost can become a significant part of the cost price.

 

Fourth, when a country (China) becomes the assembly line for the entire world, across all products, something else follows. Gradually, that country becomes the “center of gravity for the components that actually need to be assembled”, initially for low-end components, and then progressively moves up the value chain. China has been in this mode for decades. To expect the US to be able to get to the level of the component manufacturers in China is again a very tall order. For example, he says, nearly all electronics is made in China. Plenty of it, esp. the low/mid-end, is also designed in China.

 

All of which is why Thompson says the tariffs seem to be focussed on hurting China, not helping America itself.

“I suppose if the only goal is to hurt China, then shooting yourself in the foot, such that you no longer need to buy shoes for stumps, is a strategy you could choose…”