The Case of Steve Forbes and the $1,500 iPhone

The Thursday before last (1 March) President Trump met at the White House with steel and aluminum executives representing industry leaders such as Nucor, U.S. Steel, ArcelorMittal (Luxembourg) USA, Century Aluminum and JW Aluminum; choosing, or rather slightly modifying, one of the three options earlier recommended by the Commerce Department (a global tariff of at least 24% on steel and of at least 7.7% on aluminum), he announced his decision to impose a tariff of 25% on imported steel and 10% on imported aluminum.

In the meantime elites—yes, the same elites who ran this country into the ground for decades, before Trump came along—have been warning that the Trump boom will be extinguished if the tariffs go into effect. The hysteria can also be seen in the adjectives used in the media: the tariffs are routinely described as “steep” or “stiff,” sometimes as “massive,” “sweeping” or “punishing.” How dramatic! The humanity!

I’m old enough to remember when Ronald Reagan imposed an additional tariff of 45% on Japanese motorcycles in 1983 (raising the rate, initially, from 4.4% to 49.4%), and a tariff of 100% on some Japanese color television sets, computers and power tools in 1987. And the world kept turning over. An editor earning his pay would realize that the rate proposed for aluminum would be more accurately described as “low”—in fact, as “barely noticeable”—, and that for steel, as “moderate” or “modest.”

It is not new—and therefore, from a certain point of view, not news—that foreign steel and aluminum, Chinese in particular, are being illegally subsidized and dumped in the U.S. market. It might surprise most Americans, given the hue and cry over the mere 25% tariff on steel now being implemented, to learn that the Obama Administration in May 2016 imposed anti-subsidy and anti-dumping duties of up to 450% against corrosion-resistant Chinese steel (steel products, flat-rolled in coils or in straight lengths, plated or coated with aluminum, zinc or alloys based on zinc, aluminum, nickel or iron); a week earlier the Commerce Department had set punitive tariffs of 522% on Chinese cold-rolled flat steel (used for car panels and appliances). One might wonder, then, why the incomparably lighter tariffs now being implemented have caused such consternation; the answer, of course, is that the targeted tariffs are easily avoided: their existence is the reason why only about 2% of steel imports come directly from China, and why an indeterminate amount of the steel products imported directly from third countries consists of transshipped Chinese steel, as President Trump has pointed out; the latter circumstance is itself unsurprising, since China alone was responsible for 49% of the 1.7 billion metric tons of steel produced globally last year, whereas the US, responsible for only 5% of global production, imports more steel annually than any other country. The imposition of a global tariff is an attempt to close the transshipment-loophole and put an end to the game of whack-a-mole (there is still the problem of identifying the transshipped metal); thus the much lower rate, even with exemptions for particular countries or particular companies selling a specified product, is likely to be far more widely applied and actually have some measurable effect on prices in consequence. In a sense, the previous tariffs, though considerably higher, since easily avoided, were almost for show, whereas the much lower Trump tariffs, despite exemptions, are expected have some real-world impact; the outrage of those who have been profiteering from the use of subsidized and dumped foreign steel, or even only from its effect on depressing prices, is then comprehensible, if not justifiable.

The forces arrayed against the tariffs are largely ignoring, or underplaying, their positive effects, some of which are not merely theoretical, but already actual. To give just one example: U.S. Steel announced last Wednesday that it would this month begin recalling about 500 employees to its Granite City Works facility in Illinois; the steel industry maintains that each such job supports seven other jobs in the economy, and those jobs are not all local: the steel mill in southern Illinois, for example, will use taconite iron ore from Minnesota and coal from West Virginia.

The focus of the political and chattering classes has been instead on the effect of the tariffs on prices, more often from the standpoint of the consumer than the producer, which is always portrayed as negative. Now, no one expects a Congressman or a Senator to know much about anything, but, in a country as big as ours, you’d think that the commentators put on television to discuss trade would have some passing familiarity with it, or at least with the very proposal which they were booked to discuss. That has not been the case, however, in the case of the proposed metal tariffs, even on networks, like Fox Business, which specialize in economic news. An example not to be imitated was provided by Steve Forbes, interviewed by Trish Regan the same day the President announced his attention to go ahead with the tariffs. Forbes began by contending “tariffs are another word for taxes,” and when she pointed out that China was subsidizing steel and dumping it in the US, he insisted “in a booming economy, the steel industry is doing well, the aluminum industry is doing fairly well,” a view which comports neither with the opinions of the executives of those industries, nor with the facts, since factories have continued to struggle despite the economic boom: many workers laid off in 2015 and 2016 have not been recalled, and new closures are slated; according to the figures of the Commerce Department, steel is now operating at only 73% of capacity, and aluminum at just 48% of capacity; again, according to the official figures of the International Trade Administration, part of the Department of Commerce, imports of steel mill products rose by 15% last year (34.5 million metric tons in 2017 vs. 30 million in 2016). Forbes’ rosy estimate of domestic steel and aluminum manufacturing, apparently estimating their strength by such metrics as “stock prices,” was the first indication that he did not know much about the topic which he had been invited to discuss.

Doing nothing means we would be letting our boom bail out the Chinese steel industry instead of letting it benefit our own. But Forbes, although preferring doing nothing, was convinced that there were better approaches, if something were done. To fight abuses, he suggested, “you can put quotas on,” and when Ms. Regan rightly asked whether the effect would not be the same, he claimed “it’s less harmful when you put a quota on then having a big price increase, because the price increase is gonna get the pass-through, that’s gonna slow the economy down,” but of course it all depends on the level of the tariff and the level of the quota; in fact, the Commerce Department had included among its three options for steel the imposition of a global quota “equal to 63% of each country’s 2017 exports to the United States,” and among its three options for aluminum the imposition of a global quota “equal to a maximum of 86.7% of their 2017 exports to the United States,” and had explicitly stated in each case that the three proposals were all intended to raise production to 80% of capacity.

It is obvious that Forbes was neither aware that the Commerce Department had presented quotas as a possible course of action, nor that it had done so precisely because it was another way of achieving increased domestic production, which presupposes the “price increase” which Forbes somehow thought was peculiar to tariffs. It is a simple matter of supply and demand, after all: the quota, by restricting the foreign supply, given constant demand, would permit domestic suppliers to charge more for meeting the remaining demand; it is elementary that supply and demand work together to determine price; anyone who reveals his unfamiliarity with that principle displays an astounding level of ignorance, which without hyperbole can be called economic illiteracy; one would have expected such an idiocy from the lips of Bernie Sanders, but one would have thought it impossible from Steve Forbes, had he not sat for the interview.

Although Forbes continued to deny that the steel industry is “on its back,” to anyone who feels that way he offered another substitute for tariffs: “you can do the same thing as China did, you can give ’em a tax credit or a subsidy”; when Ms. Regan pointed out that that course would cost the American consumer as well, Forbes insisted that “it’s less harmful than putting a tax on and reducing economic activity.” Just as international trade in general is a rather complicated issue, the issue of subsidies in international trade in particular is complicated: some are deemed illegal, and some are not; foreign competitors might be hard pressed to make a case that such subsidies are illegal or unfair if they did not help U.S. producers capture a larger share of the market, or if the steel was not exported, but in fact some U.S. steel is exported, and the goal of the actions recommended by the Commerce Department was to increase domestic production to 80% of capacity, which is a larger share of the market (about 10% larger in the case of steel, about 67% larger in the case of aluminum).

Even if we set aside the potential problem such a subsidy would cause for the raw steel or steel product which we export, and assume that it would not be deemed unfair in the case of American steel sold domestically, we have to ask why we should prefer to subsidize domestic producers as opposed to taxing foreign producers. The subsidy favored by Forbes, like the tariff favored by Trump, is a government intervention, but the path favored by Trump is clearly the more fiscally responsible one, since it would raise revenue and hence narrow the deficit, rather than cost money and hence widen it. It is also more conservative in another respect. Subsidized foreign steel benefits from welfare; it’s paid for by the Chinese government, not our own, but it is welfare, corporate welfare (or workfare, i.e., a jobs program) at its point of origin in China, corporate and consumer welfare here. And what is conservative about either businesses or individuals being on welfare? Does dependence upon welfare become a conservative virtue as long as a foreign government is footing the bill? Again, how is it conservative to prefer a subsidy to a tariff on the ground that latter would reduce economic activity? Is it now conservative to argue that prices, at least of materials, should be kept artificially low in order to maximize economic activity? Is it no longer conservative to believe that economic actors dependent upon artificially low prices of goods are not efficient and should not survive? Any conservative worth his salt ought to understand that if prices are artificially low through government action—in this case, through the action of a foreign government—, then the market is distorted, and ought to applaud action by our government to redress the market-distorting action. But the action should not be doubling down on direct corporate welfare (and thus providing indirect consumer welfare). Forbes seems to understand only the basic effect of taxes, i.e., if you tax something, you get less of it; he seems not to appreciate the basic effect of subsidies, i.e., if you subsidize something, you get more of it. The basic problem in the global steel and aluminum market is the demand for and glut of subsidized Chinese metals; the subsidy to domestic manufacturers would do nothing to lessen the domestic supply of Chinese metals, but nevertheless increase the domestic supply of American metals, resulting in a further oversupply of the metals and a further fall in the market price, and necessitating in turn periodic increases in the subsidies; tariffs applied to Chinese metals, direct and transshipped, as well as other foreign metals, on the other hand, would serve to lessen their availability domestically and thus make it possible for domestic manufacturers to increase production without depressing the price further and so make a profit on their own.

Not content with showing himself unfamiliar with Econ 101, Forbes proved that he was badly informed about economic history as well. When Ms. Regan, though dating the Smoot-Hawley Tariff vaguely to “the 1930s,” said that “it was one of the reasons why it was so challenging and difficult to get out of the Great Depression,” he attempted to correct her by interjecting, “actually, it precipitated the Great Depression,” whereupon she agreed: “yes, that’s right, forgive me”; that tariff, however, was not passed until June 1930, considerably later than the stock market crash of October 1929, and that it prolonged or worsened the Depression is not established, since the duties did not apply to most (63%) imports, and the average on all imports, untaxed and taxed (the “free and dutiable rate”) was far lower under Smoot-Hawley (19.8% at its maximum in 1933) than throughout most of the 19th century (29.7% from 1821 to 1900).

Forbes, floundering, and perhaps sensing that his arguments were not very convincing, in order to illustrate that “there are other ways to bring pressure on China…than hurting the American consumer” suggested increasing naval patrols in the South China Sea and reintroducing tactical nuclear weapons into South Korea; it is possible to cite reasons for taking both steps, but those reasons have nothing to do with trade, nor would the steps themselves have any impact on trade: they are not a substitute for effective action in the area of trade, and should not serve as a fig leaf for doing nothing about unfair trade.

Forbes seems to have been led to conclude that tariffs were the least desirable remedy for foreign trade abuses by a gross misunderstanding of their price effects, which differ very radically when the import in question is a raw material or a component part rather than a finished good. The tariff on an imported motor vehicle, for example, might be passed through completely, or very nearly so, but the tariff on a raw material or component part might not be passed through at all, or be at all noticeable, even if fully passed through. The point, and his failure to understand it, was well illustrated by the culmination of the interview. Ms. Regan, when disputing the notion that the tariffs would hurt the consumer, a point repeatedly emphasized by Forbes, picked up her iPhone, which she costed at $1,000, and said “maybe I’m willing to pay 1500” if someone in the U.S. producing it earns a high enough wage to raise a family. Our schoolmaster confidently replied: “If you increase the price of a product 50%, that means there’s gonna be less sales, which means Apple’s gonna be laying people off, rather than hiring people….”

With a little effort, the effect of the tariff on the cost of producing iPhones domestically can be determined. The iPhone X weighs 6.14 oz. (174 g); it contains stainless steel, unlike the iPhone 8, which is made of aluminum, and while steel in general is less expensive than aluminum, stainless steel contains chromium and is more expensive than aluminum. But just as aluminum represents very little of the cost of the iPhone 8 (starting at $699), steel represents very little of the cost of the iPhone X (starting at $999); research firm IHS Markit estimated that the raw materials in an entry-level iPhone 8 cost $247.51, and TechInsights estimated that the materials in the new iPhone X cost $357.50 (the component costs do not include the costs for research and development, manufacturing, advertising and distribution); the aluminum frame of the iPhone 8 is estimated at just $21.50, and the stainless steel frame of the iPhone X at $36; the most expensive components are said to include the screens and software. Thus the Trump tariffs in prospect will not add 50% to the cost of an iPhone, as a naive viewer of Fox Business might believe; the tariff of 25% on imported steel could not possibly raise the price of an iPhone X by more than $9, a little less than 1% of the retail price, and the tariff of 10% on imported aluminum could not raise the price of an iPhone 8 by more than $2.15, about 3/10 of 1% of the retail price. And given Apple’s habit of pricing phones at levels that end in 49 or 99, it is likely that those costs would be absorbed by the company, not passed on, but if they were passed on, no one would notice the extra $9 or $2.15 after shelling out $999 or $699, before tax.

Add this example, then, to ones being given by Peter Navarro, trade adviser to the President, who has pointed out that the aluminum tariff would, if passed through fully, add 1½ cents to the cost of a six-pack of beer; by contrast, Jim McGreevy, CEO of something called the Beer Institute, predicted that the proposed aluminum tariff would cause the loss of 20,000 jobs among “brewery workers, waitresses, bartenders, truck drivers.” All that damage from a penny and a half per six pack! Bars and breweries shuttered all over America! Truckers with no place to go! In reality, at a cost increase of a quarter-penny per can, there is no reason to think that one fewer can of beer would be consumed because of the tariff, so the 20,000 jobs are safe. David Burritt, CEO of U.S. Steel, observed that between $800 and $1,000-worth of steel goes into the average car, and predicted that the price of steel would rise between 10% and 20%, which translates to an increase between $80 and $200 in manufacturing costs for a brand new car—hardly enough, even if fully passed through, to deter anyone who can otherwise afford to buy a new car, which retail from $30,000 to $36,000 on average.

In short, the sky will not fall because of a measly 10% tariff on aluminum and a manageable 25% tariff on steel. Wilbur Ross, the Secretary of Commerce, pointed out that the total amount of the tariffs, if fully passed on, would be (assuming a constant rate of imports) just $9 billion, which is a fraction of 1% of the economy. A factor—ignored by Forbes and politicians, but noted by Wilbur—which will work against the inflationary aspect of the tariffs is increased domestic production in response to them: with the fixed costs of a facility already absorbed, leaving only the incremental costs of the further production to be absorbed, there would be “fierce competition to capture that additional volume.” Simple supply-and-demand again, but lost on “experts” like Steve Forbes and the geniuses in Congress. The state of alarm could be due partly to misinformed people having unrealistic fears about the effect of the tariffs on prices, but some of the noise must be due to manufacturers who use steel or aluminum as a component, and know that the rise in their cost of production will be small, but nevertheless do not want to have to choose between absorbing the additional cost and raising prices.

I remember when Steve Forbes first ran for the Republican presidential nomination in 1996. At that time my little brother was a high school senior, and he asked me what I thought of a successful businessman like him. I said that it was difficult to form an opinion of him, and that I would feel better about him if he had made his money, instead of inheriting it. Now, when he is lambasting the Trump tariffs in interviews, I feel that he is answering at long last the question that I had about him 22 years ago. Richie Rich is just a guy who inherited a lot of money. It is hard to say what makes a worse impression, his abysmal ignorance on the topic of trade, or his smug certitude that he is right. Who knows where he might have ended up if he hadn’t been destined to edit the business magazine; perhaps he would have gained employment enabling him to acquire the expertise in international trade which he now only thinks he has.