Realist, not conformist analysis of the latest financial, business and political news

GM Suffers From Trump’s Tariffs – Big Surprise, Eh?

The standard economic claim is that tariffs upon trade are paid by the people inside the tariff barriers. The aim and purpose of said tariffs is, after all, to make imported goods more expensive to those inside the protections. Thus, goods – for in the absence of the foreign competition domestic ones will increase in price as well – inside the tariff barriers cost more after their imposition. This means, as they’re the people paying the higher prices, that it’s the people inside the barriers who carry the cost of them.

Now, exactly how they carry them depends upon the specifics of the economy imposing them. In early 19th century Britain there were significant taxes upon the import of wheat. This made grain more expensive, thus flour and bread, it was the workers who paid those tariffs upon the staff of life. In 21st century America it gets a little more complex:

General Motors Co. has become the highest-profile American company to fall victim to Donald Trump’s trade wars by cutting its profit forecast for this year on surging prices for steel and aluminum.

GM is something of an intermediary between US consumers and the metals markets. Trump’s tariffs have increased the price of metals in the US – as they’re meant to do – and this quite obviously impacts the profits of those people who transform metals into other things. They’ll try but not entirely succeed in passing these higher costs along to consumers. For at least some of the cars for sale in the US are made outside the US, out of steel which hasn’t risen in price like that inside the US. So, not all cars have risen or would in price, meaning that it’s not possible to fully pass along cost increases.

General Motors shares tumbled Wednesday after the largest U.S. automaker cut its profit outlook for the year, citing higher costs for raw materials and unfavorable foreign exchange rates in South America. Steel and and aluminum prices have been on the rise since the Trump administration imposed tariffs on the auto industry’s two key raw materials.

Note that it’s prices to come which are the real problem here, GM can see input prices rising for future production. And also that they’ll not be able to fully pass along those price increases:

The automaker buys most of its steel from U.S. producers, who have raised prices in reaction to tariffs on imported steel imposed by the Donald Trump administration earlier this year.

Sure, the tariffs aren’t on US steel. But the aim of the tariffs is to raise the price of foreign steel, so that domestic prices rise as well. That increase in profits to US steel producers is coming out of the hide of GM that is.

All of which leads to a certain puzzlement about tariffs themselves. Making US consumers poorer isn’t a known aim of economic policy. And it would be a strange enough person who thought that the Federal government knew enough to decide that some of GM’s profits should really be going to steel companies. But that is what is being claimed here. GM’s profits are going down as a result of tariffs, steel company ones up. We have to assume that this was the intention of the people who imposed the tariffs. Perhaps one day they’ll be able to explain their reasoning to us.

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5 years ago

Even if tariffs don’t raise the price of domestic steel, the end price to domestic consumers will rise as the whole point of tariffs is that previously that dasterdly foreign steel was cheaper than domestic steel, it is now more expensive than domestic steel, which even if it does not move one jot means that steel is now more expensive – the cheapest steel (domestic) is now more expensive now that the cheapest previously (foreign). I went through almost exactly this in 1990 when the UK government raised VAT, and our customers were complaing to us that *we* had raised… Read more »

5 years ago

Why would GM’s profit suffer? It will indeed pass the price of tariffs on to the car-buyer. Moreover, it will know that Ford and every other competitor is in the same boat and cannot take the chance to undercut GM. The only way GM would suffer is if the final effect is to make “America’s love affair with the automobile” absurdly expensive. Imagine if Trump transformed America’s heritage and personality for the poorer, as Obama vowed to but couldn’t!

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