The Economics of the Tariff Regime  ## Metadata - Author: [[It Could Happen Here]] - Full Title: The Economics of the Tariff Regime - Category: #podcasts - URL: https://share.snipd.com/episode/42db2f4e-b43d-43d3-8964-ea2117312ece ## Document Notes ## Highlights - **Steel Tariffs As Policy Emblem** - Steel tariffs are emblematic of current U.S. trade policy and have been unusually stable at high rates. - The EU's move to match high tariffs shows converging protectionist responses to perceived global overcapacity. Transcript: Mia Wong It It Happens Here, a podcast that has increasingly become about tariffs in the second Trump regime. I am your host, Mio Wong. And oh boy, it has been a big few weeks for tariff news. We have tariff numbers on China that I'm not even going to bother to actually record right now, because by the time this goes out, the numbers will probably be different. There are supposed to be major negotiations underway between Trump and the Chinese government to attempt to come to yet another trade agreement and stave off yet another round of 100% Tariffs. Now, if you want to follow the sort of blow by blow of what exactly is going on, I'm going to just sort of refer you to my section tariff talk on executive disorder. However, comma, we need to take a deeper look at what structurally is going on in the global economy that is resulting in the demand for tariffs in the first place. And I think the place to go, if that's the thing that you're trying to figure out, and we've talked about the sort of ideological aspects of this in other episodes, we've talked about The ways that the sort of politics of fascism, the politics of anti-Semitism, the politics of masculinity lead people towards these extremely ultra-nationalist policies that are Specifically supposed to sort of protect the domestic blood and soil national and are supposed to protect material goods over services. But there are things that are happening structurally in the economy that make it such that people would consider things like the tariffs that have been happening under this regime As a solution to things that are kind of structural problems of the economy. Specifically, and this is what we're going to be focusing on today, overcapacity and steel. Now, some of you may be asking, Mia, why are we talking about steel overcapacity? And I think there's a few important notes here. One, steel is in some ways emblematic of American tariff policy. It is, I guess you would call it the most material of the tariffs in the sense that it's the one where there's the most actual direct sort of material forces and direct lobbying groups Asking for these specific tariffs. The American steel industry has been lobbying to some extent for some measures kind of like this. Steel is also one of the industries where as tariff rates have fluctuated and got up and down and whole waves of like Liberation Day tariffs got put into place and then removed and some Of them got put back into place a little bit. The steel tariffs were set at 50 percent and they've stayed at 50 percent since they were set. Basically, there's been a little bit of variation sort of before the final 50 percent number was arrived at. But the steel tariffs have been one of the most stable tariffs. And the reason why it's been this stable, if people can think back all the way to 2018, which I know that was a long time ago, but there was a miniature trade war between the U.S. And China in 2018, and significant portions of it were focused on Chinese steel production specifically. And, you know, this is one of the sort of fights that was had out. Nothing really structurally changed much from those. There was kind of a back and forth and then both sides kind of pulled back. But, comma, that's not happening this time. And what's interesting, and the reason that I'm specifically talking about steel here, is that it's now not just Trump that is attempting to institute large-scale tariffs on steel. The European Commission for the EU has released a proposal to double tariffs on imported steel, up to 50%, which is matched in the U.S., and also reduce the amount of steel that could Be imported into the EU without paying any tariffs at all. And this is actually massive, because this is an example of the EU effectively following U.S. Trade policy for very, very similar reasons as the U.S. And if we can get to the bottom of what is going on here, and I promise we will, and I promise this will go towards something that is explaining really, truly the macro dynamics of the entire Global economy and why it's fucked. If we can actually trace out what's going on with these steel tariffs, we can do that. ([Time 0:03:10](https://share.snipd.com/snip/ee85ecaf-eeef-4b01-91f2-70db4ad6ee74)) - **Overcapacity Numbers Are Unreliable** - Measuring steel overcapacity is highly uncertain because utilization rates vary seasonally and for many reasons. - Western and Chinese estimates diverge for political reasons, so headline numbers are suspect. Transcript: Mia Wong Overcapacity as a concept is sort of convoluted. You know, you have to sort of ask the question, what is the quote-unquote correct amount of steel? Because overcapacity, you know, implies that there's capacity to produce steel over the amount that should be produced. So, okay, how do you figure out how much steel should be produced? Very nebulous. It's also very difficult to measure because, okay, we're going to try to measure steel over capacity. There's a lot of ways to do it that rely on things like utilization rates, right? So you look at the steel facilities, you see how much they're being used at, you see how much, you know, excess capacity there is, how many, how many factories are sitting empty, what Percentage of the factories, you know, total output's being used. This doesn't work because the utilization rates of these factories, of this fixed capital varies seasonally, for example, and it varies due to not just the season, but a whole bunch Of other factors, things like, you know, labor supply, weather, demand pulls, and a whole bunch of other factors. Utilization rates of steel producing facilities are very rarely at 100%, even in markets where demand is shipped supply. And this makes it very, very difficult to measure China's actual quote-unquote overcapacity. I am not going to even really try to give numbers because it's extremely subjective. How do I say this? Based on the research that I have done, I think the numbers you normally see in the West are inflated because they are not accounting for things like the weather because it is in the interest Of sort of Western research institutions, but for example, Western financial institutions, specifically steel companies, and they're sort of like allied China Hawk, you know, Of like academics to have the number be as high as possible. You will also see numbers from people who are tied to the Chinese government. And when I say tied to, I mean kind of in a loose ideological sense in the same way that the China Hawks are, or the China Hawks tend to actually be more directly connected to the US government. Their numbers are probably also too low, but I don't want to give you the impression that I have a extremely certain understanding of what the exact number of billions of tons of excess Steel production is happening. ([Time 0:08:06](https://share.snipd.com/snip/51411148-20c1-402f-992b-709f68eb9bd3)) - **Cadre Incentives Inflate Production** - Local cadre performance incentives in China can drive pointless steel output to boost GDP figures. - Those political incentives help explain baffling investment and persistent excess production. Transcript: Mia Wong I think it's pretty fair to say that something is overcapacity if it's producing a bunch of steel that sits there and rots because no one can sell it, which is a thing that happens with Chinese steel. And one of the most interesting theses that has really been abandoned, even though I think it is actually, to a decent extent, explanatory of a lot of very, very weird stuff that happens In Chinese policy circles and a lot of just very baffling investment decisions is specifically something about local cadres and their performance incentives. So, OK, something that's very important to understand about the structure of the CCP is that Chinese government institutions are sort of run by these cadres, right? And so if you are, for example, I don't know, you are the mayor of a mid-sized city, right? You get performance evaluations. And those sort of yearly performance evaluations, sometimes there's less frequent than that, but those performance evaluations rank you at sort of how good you're doing your job. And obviously there's political maneuvering here too, but if you do a good job of hitting your targets, this is your path to advance upwards in the party and be moved from, you know, like Sort of running a small city to like being brought into cadre in larger cities and, you know, moving your way up the party, moving to national positions. These evaluations are extremely important. You can also get sort of busted down if your evaluations suck. Again, there's also like politics here too, but these evaluations actually do matter. And one of the issues with these evaluations, and these are also policymaking implementation tools, right? You know, the central government can decide what kinds of policies they want to pursue, and then they can use these cadre evaluations to make people at the sort of local level who are Usually semi-autonomous in ways that I think is not very well understood in the West. These cadre evaluations are ways to try to ensure that Chinese sort of local and provincial government policy kind of aligns with national party policy. And the weighting on these examinations is such that it has very very weird effects and what i'm specifically talking about here is that gdp numbers are very very important to these Cadre evaluations and it matters that it's specifically gross domestic product because gd a very, very weird number. And there's a lot of stuff you can do to sort of juice GDP numbers that aren't really necessarily beneficial to an economy. So you can have a bunch of firms are basically unprofitable or doing something that's like not particularly economically or socially useful, and that can still boost GDP numbers. And one of the things that happens with this is that you can boost GDP numbers by making a shit ton of steel that nobody actually really wants or uses. And because of the priority that's set on GDP numbers specifically, and there's also a whole bunch of these sort of weird financial games that you can play that's also played a major Role in the way the Chinese housing bubble has played out and the way that the government has been unwilling to sort of, you know, and when I say the government here, I mean both the national Government and also sort of these lower level governments have been unwilling to sort of let a bunch of debt bubbles that they've accumulated pop because those things prop up GDP numbers. And the incentive on the local level is to keep these numbers up. This used to actually be one of the things that people would talk about when they talked about Chinese steel overcapacity. But it's complicated. ([Time 0:13:43](https://share.snipd.com/snip/e5168bac-4106-4efc-b6fb-fefdd344ed42)) - **Inequality Drives Underconsumption** - High inequality and suppressed wages in China reduce domestic demand and worsen overcapacity. - Poorer households cannot absorb produced goods, so slack capacity remains unused. Transcript: Mia Wong And I want to talk about one other argument that's also not really used much that used to be a lot more common, which is an argument that a Chinese economist makes that one of the reasons That there's overcapacity in Chinese steel production is that upwards wealth distribution leads to lower levels of consumption and thus overcapacity. And so what this basically means, and this is something that I think is actually also a thing that's been a structural problem in the Chinese economy, is that the Chinese economy is extremely Highly unequal. And wages, you know, like they have risen to some extent, but they're not rising anywhere near, you know, like everyone in the U.S. Has seen that famous chart of productivity versus like labor gains, right? It's like wage gains versus productivity increases. Wages in China have gone up. They have absolutely not kept pace with sort of productivity growth. And they also absolutely like have not kept pace with the amount of the profit being produced that is going to a very, very small number of capital owners. And this actually creates a structural problem. And this is, we're seeing a very similar structural problem to this in the U.S., where there is a lot of consumption that if that money wasn't just all going to a bunch of rich people, people Would actually be spending it on things. And particularly in Chinese context, the argument was that if there was a better distribution of wealth, people would buy more houses. And this would actually reduce overcapacity because suddenly a bunch of the slack capacity would be being used to like build houses, except people can't afford the houses. And this is a structural problem that economists have sort of known about for decades and decades, which is that China has been for a very long time, the whole thing was that they were Trying to transition into a consumption economy, which is to say they were trying to transition into an economy that was fueled by its own internal consumption. The U.S. Is, to a large extent, sort of kind of works like this, where, you know, you want to increase the level of consumption, the amount of stuff that people in your country are buying. And this is this is a way to sort of like create a middle income country. Right. And China has historically not been able to do this and haven't been able to do this because they won't raise wages. But, you know, if they won't actually raise wages enough to increase people's consumption levels, then you're left with structural overcapacity because demand is being lowered Because people don't have any fucking money. Now, this is another argument, again, that I think is also probably correct that is very much not talked about anymore, because the argument that is used in sort of understanding what's Going on with Chinese steel capacity is about the Chinese subsidization of state-owned enterprises at the expense of sort of private firms. ([Time 0:23:21](https://share.snipd.com/snip/b00219c3-947c-4861-a985-cb467eb29e3b)) - **Overcapacity Is A Global Problem** - The dominant Western explanation blames Chinese state subsidies, but global overcapacity exists beyond China. - Pinning the crisis on one country simplifies a broader structural problem. Transcript: Mia Wong And this is sort of true, but this became a massive geopolitical argument because the argument from the American side, and when you hear anyone talking about steel capacity, now, this Is the argument that you hear, right? Which that China is flooding the world with cheap steel because there's a whole bunch of like Chinese state-owned industries or just like Chinese businesses are just getting money From the Chinese government to produce steel and they're pumping cheap steel to the rest of the world. And this is not really, I mean, like, kind of this is happening, but it's also not the reason why there's large scale steel over capacity. And of course, the argument is that China isn't competing fairly in the market. Like, this is very silly. Markets have never worked without large scale state,, quote-unquote, interference. Like, American companies also get extremely high-level subsidization, etc., etc., see all of U.S. Corn policy. But, you know, this is the political imperative that's behind a lot of the rhetoric coming out of steel producers and out of the American right about why there should be tariffs on steel. Now, there's a problem, though, which is that all of these arguments are very specific to China, right? The argument is that there is specifically steel overcapacity in China because there's something structurally specifically wrong with the Chinese economy that's like makes it Not a free market. And because of that, China is like unfairly competing global market. And this is why there's so much over capacity of Chinese steel. This is wrong. There are individual parts of this where, yeah, like there are things where there is excess capacity being produced by cadre valuations and by, to some extent, like SOE subsidization. However, comma, there's a problem. And the problem here is that overcapacity and overcapacity in steel is not just a Chinese phenomenon. It is a global phenomenon. ([Time 0:26:29](https://share.snipd.com/snip/c8ca9f3b-da1e-40d4-be61-75ae0261d0b7)) - **Wages Tie Production To Demand** - Marxian theory links overproduction and underconsumption via wages: wages allocate production and consumption. - Automation raises capital intensity, reduces labor, and deepens demand shortfalls and immiseration. Transcript: Mia Wong So why is there not enough demand to fuel the amount of supply that would be necessary to make there not be overcapacity? The answer to this in sort of Marxian theory is that, as they sort of put it, overproduction and underconsumption are doubly constructed. I'm going to read a quote from End Notes, Volume 2, and then we're going to explain a little bit what that means. The wage allocates workers to production and at the same time allocates the product to workers. So what that means is that underconsumption and overproduction are, in effect, the same thing, right? Because the way that we allocate workers to what thing they're going to do and at the same time allocate products to those workers is the wage, which is one thing. So overproduction and underconsumption are the same thing, right? And they're caused by the same structural elements of the wage relation. Now, this means that the Chinese capacity crisis is actually part of a larger crisis, right? You know, the thing about the double construction, you know, of overcapacity and underconsumption, right? The fact that they are really the two thing that's unified in the fact that, like, your wage allocates what kind of production you're doing and what you can consume. The fact that both those things combined are realized in this sort of secular crisis in what's called Marx's absolute general law of capitalist accumulation. So what the fuck is that? The short version is over time in capitalist economies, there's supposed to be an increase of what's called the organic composition of capital. Basically, the organic composition of capital is a way to measure how much in the labor process is like fixed capital, variable capital. So it's like how much factory is there relative to the amount of worker there is. And Marx's thesis, which has generally been borne out, although we'll talk a little bit about that more later, is that this composition going to increase. And as it increases, accumulation also needs to increase in order to maintain employment levels. This is sort of accomplished by things like automation, which reduces the size of the labor force. And thus, to quote end notes again, as accumulation proceeds, a growing super abundance of goods lowers the rate of profit and heightens competition across lines, compelling all Capitalists to, as Mark said, economize on labor. So basically what this means is like as capital gets turned into more capital and larger amounts of capital, this is the accumulation process. As this continues, right, you get this massive sort of increase in the amount of goods that are being produced. Eventually, that lowers the rate of profit in a sector. And eventually, what that does is, in order to sort of economize on labor, capital increases the amount of automation, reduces the amount of people that they need in the labor process. You know, this is what's generally known as automation and the sort of crisis of people getting kicked out of their jobs because of it. As this process is sort of generalized across sectoral lines, across different parts of the economy, the relative demand for labor decreases and workers are spit out of the wage relation, Which is the fancy Marxist way to say they become structurally unemployed. And, you know, the thing that happens you get kicked out of the capitalist wage relation is you get kicked into informal labor and slums, which, you know, decreases demand and increase Overproduction at the same time overcapacity is skyrocketing, right? Because you have increasing numbers of people who have been spat out the formal economy, who no longer have access to regular wages. The wages they get in the informal economy are less than the ones they would get in the formal economy. And as we were saying, right, access to like the wage both determines production and consumption. So if you lose access to the wage, right, and there's still more stuff being produced because of automation levels, what you get is a massive skyrocketing double increase in overproduction And under consumption, right? Because there's just not enough money to fucking buy the stuff. And the result of this is immiseration. Everything gets fucking worse. ([Time 0:34:40](https://share.snipd.com/snip/ba5335f9-05f0-4377-8848-2661a1f592d3))