With many NZ Mainstream Media outlets taking a negative position on the tariffs coming from the Trump administration, The Daily Examiner’s Victoria O’Brien explains the five levels that underpin the decision-making.

By Victoria O’Brien:

This is not a “new economic theory”, in fact a very old one but it requires accounting for human behaviour & negotiation, and a knowledge of transfer pricing practices.

Level 1:

US govt takes in more tax from imported goods, which become more expensive. The assumption here is that suppliers of imported goods pass on all or some of the higher tariffs. There is also the assumption that as a consequence, the demand for some goods falls (depending on demand elasticity for the particular good) so much that it becomes uneconomic for the supplier to continue to sell into the US.

This is the level at which many are freaking out.

Level 2:

Suppliers of imported goods realise demand for their product has fallen in many cases and so possibly absorb more of the tariff &/or reduce their (foreign, non-US) input costs to keep any increase as low as possible, so as to not lose too much market share to US-supplied goods. US consumers switch to US-supplied goods which are now priced more attractively in comparison with imported goods. This increases demand for US-manufactured & grown goods, which in turn improves the businesses of US manufacturers & farmers. Initially, ceteris paribus, volume simply increases & profitability grows. Then US businesses will have funds to expand & increase their workforce. Unemployment goes down.

US govt increases company tax take while tariff revenue falls, but unemployment costs also fall.

Level 3:

Suppliers of imported goods try to avoid tariffs by switching some or all of their manufacturing to the US, for US-supplied goods. This was seen almost immediately by companies such as Taiwan Semiconductor that announced new investment for semiconductor manufacturing in the US. Of course, in Taiwan Semiconductor’s case, the move is simultaneously an insurance against any geopolitical changes (like heightened tension in the South China Sea) that might hinder or block shipping of their product. Hyundai’s proposed new steel plant in Louisiana is an example of new manufacturing of components, using US-sourced raw materials, to supply existing and expanded manufacturing capacity in the US.

This produces more jobs in the US, lowering unemployment. Once again, US govt increases company tax take as above.

Level 4:

Companies that have benefiting hugely from transfer pricing practices will now repatriate their offshore profits to avoid tariffs. Apple is an excellent example. Classic transfer pricing – it has been manufacturing iPhones in China for a very low cost (US$5 or thereabouts?), which it then “sells” to a subsidiary in a zero tax jurisdiction. That subsidiary then “sells” to the US subsidiary for a vastly higher amount that is closer to what the end consumer pays, say US$1000. The US subsidiary then sells the product to the US consumer for say, US$1010, thus reporting a profit of something less than US$10 (less US marketing, admin & logistics costs) on which tax is paid. Thus there is a significant profit that the overall corporate entity accumulates that is effectively quarantined in the zero tax jurisdiction. The interplay between higher tariffs & lower corporate tax will make it far more profitable for such companies to repatriate their offshore profits and switch manufacturing to the US. Apple has already seen this and announced a US$500b investment.

Once again, unemployment goes down, US govt increases tax take etc etc.

Level 5:

The increased tariffs break the status quo and force US trading partners to the negotiating table, not just on trade but in a myriad of other areas. The US is such a massive global consumer that its buying power simply cannot be ignored. This is a huge geopolitical advantage for the US. All of this goes beyond mere economic theory of course. Also, there will be far wider effects I haven’t thought of but which far smarter people, like Scott Bessent & the rest of Trump’s team, have already mapped out.

Timing with China’s economic downturn is one massive potential disrupter. A potential massive depopulation in the next decade in developed countries (which Elon Musk & Edward Dowd have referred to numerous times) is another.