… by taking full advantage of the global division of labor.
Yesterday I was chatting with my friend Mike Long, who recently became CEO of AnyDATA . AnyDATA’s main product line consists of electronic devices that plug into automobiles’ computer systems and wirelessly feed a wide variety of data on the automobiles to those who are interested in such data. (Among those who are interested are drivers themselves, automobile manufactures, and automobile insurers.)
AnyDATA is located in southern California. Most of its employees are high-tech geeks who conceive and design these devices. The physical construction of Anydata’s devices, however, takes place in China.
I asked Mike if his company would exist if it had to rely on such devices being produced in America. His instant answer: “No.”
The ability of AnyDATA to tap into the comparative advantage of the Chinese at physically assembling such electronic devices is what makes AnyDATA a reality and, hence, what makes the jobs and relatively high incomes of AnyDATA’s American employees possible.
People such as Trump and others in his troupe of economic nationalists look at the assembly in China of AnyDATA’s devices and lament that these devices aren’t produced in the United States. But what people such as Trump and others in his troupe of economic nationalists do not see is that if tariffs are used to restrict the importation into the U.S. of these Chinese-assembled devices, such devices will not then be manufactured in the U.S.
The most likely consequence is that similar devices will be imported from a country or countries other than China. But because, absent tariffs, such devices would continue to be assembled in China, the tariffs shift assembly of these devices to countries in which assembly costs are higher than in China. The prices that AnyDATA must pay for such assembly services rises. In turn, prices at which AnyDATA sells its devices to its customers rise. As a result, AnyDATA will sell fewer devices than otherwise. It’s business will suffer.
If instead Uncle Sam imposes high tariffs on the importation of such devices from any country, AnyDATA almost certainly must drop this line of products. Indeed, AnyDATA might be forced out of business altogether. Given the cost of American labor and other inputs, producing such devices in the U.S. would today simply be uneconomical.
Looked at from a slightly different angle, here’s a list of possible economic outcomes involving industries of the sort to which AnyDATA belongs:
– Americans specialize in high-value-added activities such as inventing and engineering the devices that AnyDATA sells; other countries specialize in the lower-value-added activity of physically assembling the devices.
– The U.S. government obstructs the importation of such assembled devices, causing Americans to play no, or a much smaller, role in the global industry that creates, engineers, and produces such devices.
– The U.S. government conducts protectionist trade policy such that it gives Americans once again a comparative advantage at performing low-value-added tasks such as assembling the devices sold by AnyDATA; Americans would then specialize, not in the high-value-added activities such as inventing and engineering such devices, but, instead, in the lower-value-added activity of physically assembling such devices.
Bottom line: The profitable operation today of many American-based firms depends upon their ability to import low-cost devices and other inputs from other countries. This ability to import low-cost inputs is vital to the creation and profitable operation of many high-value-added American firms, such as AnyDATA.