Roughly two-thirds of the 324,500 vehicles Mercedes shipped to dealers in the U.S. last year were imported, and even the popular GLE and GLS SUVs it assembled in Tuscaloosa, Ala., used engines and transmissions from Europe.
New U.S. tariffs could cost the company $1.7 billion this year, according to brokerage Bernstein—14% of expected operating profit. Parts account for roughly a third of the potential impact.
That is before any potential retaliation by U.S. trading partners. Mercedes exports most of the vehicles assembled in Tuscaloosa, exposing it to tit-for-tat tariffs.
China, a key market for the factory’s cars, has already imposed an additional 10% tariff on big vehicles from the U.S., in response to an extra 10% levy on all Chinese products introduced by the White House in February.
Mercedes’s plight is an early illustration of how even foreign companies that have invested billions in local factories can come unstuck at a time of fast-changing trade policies.
The administration seems to believe that this pause will give automakers time to shift production to US soil. Trump’s argument boils down to: once cars are produced domestically, no need for tariffs!
This logic fundamentally misunderstands why production occurs where it does. If domestic production were truly the most efficient option, companies would already be manufacturing here, without government pressure. While domestic production avoids tariffs, it won’t necessarily result in lower prices for consumers, due to higher labor and material costs.
When these higher prices inevitably materialize, what happens next? Following the dynamics of interventionism, we can predict a third wave of interventions: perhaps subsidies for US automakers or tax credits for consumers who “buy American.” These policies will artificially shift demand toward domestic producers, creating substantial economic deadweight loss and trapping labor and capital resources in sectors where they’re less productive than they could be elsewhere.
“Tariffs are going to raise about $600 billion a year, about $6 trillion over a 10-year period,” Mr. Navarro told Fox News on Sunday. This is on top of $100 billion a year from Mr. Trump’s car and truck tariffs. He also tried to claim that “the message is that tariffs are tax cuts.”
George Orwell, call your office. In the real economic world, a tariff is a tax. If you raise $600 billion more a year in revenue for the federal government, you are taking that amount away from individuals and businesses in the private economy.
By any definition that is a tax increase, and the $600 billion figure would be one of the largest in U.S. history. It amounts to about 2% of gross domestic product, and it would take the federal tax share of GDP above 19%. The average since 1975 is about 17.3%. Democrats, who love tax increases, haven’t dared pass such a large revenue heist.
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The President’s ideological fixation on tariffs is crowding out rational judgments about the consequences. Americans are being told to accept the pain of higher prices, a slower economy, and shrinking 401(k) balances in the name of Mr. Trump’s project to transform the American economy into what he imagines it was like in the McKinley era of the 1890s.
Navarro’s economic illiteracy about tariffs and his apparent unwillingness to recognize that governmental policies have trade-offs is the sort of thing you might expect from a progressive Democrat or someone else on the far left of the political spectrum. And, indeed, that’s basically what Navarro is—he was once called “San Diego’s Bernie Sanders,” as I detailed in a December 2020 feature for Reason.
Like with many of Sanders’ ideas, buying Navarro’s pitch on tariffs requires more than a bit of magical thinking.
You’ve probably heard that President Donald Trump is prepared to slap some huge tariffs on nearly all imports from Canada and Mexico this week.
But you might also be wondering: How is it that the president can unilaterally decide what tariffs get charged on which imports? And if he’s determined to make everything from Canadian whiskey to Mexican avocados more expensive, can anyone stop him?
“It absolutely should not be one person making these decisions,” Rep. Suzan DelBene (D–Wash.) tells Reason. She’s sponsored a bill that would require Trump—and any other future president—to get permission from Congress before using emergency economic powers to levy new tariffs on American consumers.
John Garnett is right that “Trump was right to kill the EV mandate.”
Paul Samuelson’s Foundations of Economic Analysis cast a long shadow over economics. It centered economic reasoning around optimization and equilibrium. And economists treated economic policy as an exogenous variable, meaning that government behaves as a totally independent actor, capable of wise and benevolent intervention.
But the Samuelson paradigm is inadequate. Both before and after Samuelson, economists working outside of that paradigm have provided a better description of economic behavior.
Individual behavior consists of habits and experimental changes to those habits. The individual or firm owner responds to three levels of influence: its own preferences; the norms and expectations of the small groups to which the individual belongs; and the customs and formal rules given by the larger society. As the group norms or social rules change, individuals must react.
The overall behavioral system is complex, in the technical sense of that term. It is impossible to know how a change in behavior will affect the overall system. Every change of individual habits, group norms, or formal rules is an experiment, and people learn by trial and error. Learning is a challenge, because many factors affect outcomes, and no one can be certain how the causal chains interact.
Katherine Mangu-Ward puts in a few good words for luxury beliefs. A slice:
Historically, many ideas that once seemed to be eccentric elite fixations eventually became mainstream. Some of them fundamentally improved human civilization. The abolition of slavery, religious tolerance, gay rights, free markets—each of these can trace at least part of their genealogy to a fringe belief held by a small, educated, and often elite minority before gaining wider acceptance.
In the early 19th century, abolitionists were often portrayed as disconnected from the broader populace’s economic interests and social norms. Critics argued that their calls for immediate emancipation threatened the established economic order. George Fitzhugh, one of history’s truly grotesque antiabolitionists and one of President Abraham Lincoln’s least favorite people, wrote of the dire consequences of “liberty and equality” in 1854’s Sociology for the South. “Crime and pauperism have increased. Riots, trades unions, strikes for higher wages, discontent breaking out into revolution, are things of daily occurrence, and show that the poor see and feel quite as clearly as the philosophers, that their condition is far worse under the new than under the old order of things.”
