Last week it became clear for everyone on this planet that the most powerful person in the world the next four years will be Donald Trump. With his ascension to power, he takes with him a list of promises that have resounded among his voters and that he has repeatedly stated he will keep. Among the most popular ones are those policies aimed to relief the steady loss of purchasing power of middle-class Americans.
As the graph below shows, there is little doubt that the matter is a serious one. The American middel class is almost entitled to be angry. Even as they have become increasingly productive, they haven’t seen any significant wage increase since 1973.
This increase of productivity has though allowed an increasing gap between top earners and the rest, as the following graph proves. (Source: Economic Policy Institute)
There are several reasons for this development (Look at the year it all started and give your regards to Richard Nixon and Bretton-Woods). However, Trump has chosen to focus his message putting the blame on one single cause: The outsourcing of American manufacturing jobs. He has been specially harsh on Apple, urging them to transfer their production from China to USA.
“I’m going to bring jobs back. I’m going to get Apple to start making their computers and their iPhones on our land, not in China”
The magic tool he is willing to set in motion is a sky-high 45% tariff on imports from China (or for all accounts any other country with lower wages that USA). The intention is of course to make production overseas financially indefensible and force American firms to produce in USA, automatically creating jobs.
The problem with this solution is that it cannot work, because it defies the very economics of today’s wave of digitalization. Indeed, the solution suggested by Trump would harm the American middle class even more.
First of all, the production of all electronic equipment, from flat screen to computer chips, is concentrated in the hands of a very limited number of subcontracted manufacturers. The reason is the gigantic scale necessary to produce such razor-margin devices at a profit. Not even Apple, the most valuable company in the world, has the economies of scale to manufacture its products itself at satisfactory margins. For that task it relies on Foxconn, the Chinese contractor manufacturer. Another example is Qualcomm, the chip company that supples almost every relevant mobile phone brand in the world. Qualcomm may design its chips in USA, but manufacturers them at factories owned by Samsung, their most direct competitor. Scale means everything, even more than bitter rivalry.
It is also a question of know-how. The experience acquired by these subcontractors through years of production at ultra low-cost would be extremely difficult to replicate. Putting all together, it becomes obvious that to copy the scale and know-how of the current supply chain within the borders of USA would be an exhausting task.
The result of Trumps policy will therefore be more expensive American products for the American consumer. First because of the huge import tariffs, then through the enormous investments necessary to replicate the manufacturing base installed overseas and the associated know-how. All these costs will be unavoidably paid by the American consumer in the form of higher unit prices.
And then there are the jobs. Even if Trump succeeds forcing all companies from all industries in USA into starting manufacturing in USA again, that won’t create a noticeable impact in the number of jobs. The reason is the unstoppable wave of digitalization and automation that is taking away the jobs from the middle class at high speed. The very Foxconn mentioned above has recently replaced 60.000 workers with robots. Even Chinese floor workers are too expensive to compete with robots nowadays.
It is therefore highly improbable that American companies, from car makers to chip producers, would start hiring new workers in droves even if they transfer all their production to the US.
They will install robots.
Already in a piece from 2013 (an eternity in the Industry 4.0 era), the MIT technology Review stated that there had been sold 320.000 industrial robots in the US in the two previous years. Indeed, a growing number of startups are doing everything they can to create specialized robots that make humans redundant in all sorts of typical middel class jobs linked to manufacturing and administration.
Trump is wrong when he looks into the past in order to solve the problems of the future. Tariffs and protectionism have never been a wise solution. It is free trade, democracy and technology that is making poverty disappear.
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