The United States President-Elect Donald Trump looks like he is ready to go to war with some of the largest automobile makers in the world today. He may have won a short-term battle with Ford, but it seems as if he is entering a losing battle with General Motors and now Toyota. And also, well, basic economics.
Trump, who enters the Oval Office in the next 15 days, warned Toyota that if it builds a new plant in Mexico in order to manufacture Corolla cars then it will “pay [a] big border tax.”
Here is the tweet:
“Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
— Donald J. Trump (@realDonaldTrump) January 5, 2017
Toyota has not issued a statement on the president-elect’s comments.
This week, Toyota President Akio Toyoda said in Japan that the automaker does not have any immediate plans to reduce production in Mexico. Toyoda did note, however, that the company will wait until after Trump’s January 20 inauguration to make any adjustments if necessary.
In the past, Trump has warned that if corporations relocate their operations to foreign jurisdictions then they will face tariffs. He recently presented that message to General Motors, even though a majority of its cars are already manufactured in the U.S.
Trump refuses to understand that Toyota is just using the laws of comparative advantage. It is that simple.
. Reagan and the economists he appointed understood the concept of comparative advantage some of Reagan’s most well known quotes on the topic quotes include:
As the leader of the West and as a country that has become great and rich because of economic freedom, America must be an unrelenting advocate of free trade.
Address Before a Joint Session of the Congress on the State of the Union, January 25, 1983
High trade barriers, what is often called protectionism, undermines economic growth and destroys jobs.
Radio Address to the Nation on Free and Fair Trade August 2, 1986
Well, the way up and out of the trade deficit is not protectionism, not bringing down the competition, but instead the answer lies in improving our products and increasing our exports.
Radio Address to the Nation on Free and Fair Trade and the Budget Deficit, May 16, 1987
Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930 which remains today as the prime example of the damage that protectionism can do. Protectionism is the progressivism of fools. Gandhi was a great statesman but a horrible economist. Just as the ignorant in the USA argue that American workers who earn $15 per hour should not have to compete with Chinese workers who make $2 per hour, Gandhi thought that Indian workers should not have to compete with American and European workers who have the benefit of modern machines. As a result India adopted protectionism. In 1947 the per capita income of India was similar to countries such a South Korea. By 1977 the per capita income and standard of living in South Korea was many times that of India. India has since largely abandoned protectionism and has benefited immensely from free trade. Just as David Ricardo proved would be the case when he developed the concept of comparative advantage.
Many of those well versed in economics are concerned with the threat of possible protectionism in the form of tariffs and/or a border adjustment tax from the Trump Administration. However, there is a much worse form of protectionism than tariffs and border adjustment taxes. Tariffs and similar taxes do at least raise revenue for the government which could lower the deficit.
The worst form of protectionism comes in the form of quotas. Quotas are bilateral agreements, negotiated by governments which allocate shares of the market that thus restrict exports and imports. None of the higher prices on the restricted goods are remitted to governments as is the case with tariffs and border adjustment taxes. The losses to the consumers are allocated to the favored producers under a quota system. Prices are always higher and production is always lower under a quota regime than would be the case in a free market. Higher consumer prices leads to lower standards of living. Lower production always leads to less employment.
The worst impact of quotas is that firms involved have little or no incentive to innovate. If the amount they sell is determined by quotas, then the most important and desired employees of the firm are no longer the scientists and engineers would can come up with the best innovations and inventions. Rather the most sought after and highest paid employees of the firm become the politically connected lawyers and lobbyists who can influence the quota allocations in such a way to most benefit the firm. Trump is no Reagan on trade. Trump is a protectionist. Furthermore, the prospect of the Trump administration negotiating bilateral trade agreements featuring quotas is frightening….”
http://seekingalpha.com/article/4033258