Porter Replies To Reader Emails On The Topic
Inside today’s Daily Journal…
Essay: Why Tariffs Still Don’t Lead To Prosperity
Private credit defaults are rising
Bombing energy infrastructure extends the war
The Fed, interest rates, and inflation
Chart Of The Day… Mitsui & Co.
In Monday’s Daily Journal, I explained “Why Tariffs Don’t Lead To Prosperity,” writing…
And… when I explain that tariffs are merely taxes and more government is never the answer? You see the true believers emerge. Contrary facts do not change their minds. They deepen their conviction. Nevertheless, it’s only facts I have to offer.
Indeed, the “true believers” responded strongly – and angrily – to what I said about tariffs on Monday. But I also received some very reasoned responses. So in an extended version of the “Mailbag,” I share – and respond to – three of those emails today.
“Why Do Other Countries Use Tariffs?”
David T. writes:
Hi Porter,
Your explanation of the tariffs being doomed for failure was very well explained, as usual for you. The best line you wrote was at the end: “Tell me what you think… but please at least think first.” I love it. I can’t wait to use it.
That, along with a few of your other favorite lines (e.g. There’s no teaching, only learning) could make up for some “Porter” merchandise. Maybe some baseball hats or T-shirts with these lines on them for sale or promotional giveaways to your fans.
Next time, I hope you can explain why so many of the ex-USA countries charge tariffs if it’s such a bad idea for the U.S. to do so. I have my ideas as to their limited economies making them different in this regard, but I’m sure you could clarify it better than I could.
Porter Comment: Politicians love tariffs:
They can tell the voters that someone else pays them
They extend their protection racket over any industry that wants protection from better, foreign competitors
Of course, neither is good for the economy. But both are good for the politicians. – Porter
“Response To Monday’s Essay On Why Tariffs Don’t Create Prosperity”
Steve B. writes:
Dear Porter,
We’ve met a couple of times. I’m a Porter & Co. lifetime member, and I generally enjoy and appreciate your work!
Regarding my ability to speak to tariffs, I’ve lived overseas multiple years, Asia-Pacific (two locations, SE Asia and Tokyo), Australia, and Europe, plus have extensively worked in approximately 20 countries, built engineering centers in three countries and built approximately 10 manufacturing plants in five countries.
Every single manufacturing plant I built in Asia-Pacific resulted in the closure of an American manufacturing plant in either Michigan, New York, Ohio, or Wisconsin. The bottom line: I’ve met no one who can BS me on tariffs.
Most of the world has put duties, tariffs, taxes, or whatever you want to call it on American products, and America has let products come from the same countries virtually tax-free. The result is the country’s extreme deficit of trade, and the gutting of America’s manufacturing capability to the extent that America can build very few value-added products. For example, America can no longer build an automobile. It can assemble an automobile but building an automobile and assembling an automobile are two entirely different matters. Assembling an automobile has very little value added and can virtually be done almost anywhere in the world. America no longer designs, builds, or manufactures most of the key components in an automobile, and this is where the real value-add occurs.
This is not only true for our auto industry, but also for almost all our industries that require taking raw materials and producing a needed manufacturable good. This gets to the heart of a country’s standard of living, and the value a country brings to the world…
Now let’s consider two points you make in your writing:
The U.S., meanwhile, specializes in the high-value, high-return work: design, intellectual property, marketing, finance, and e-commerce
America gets to keep all the highest-paid staff: the designers, R&D, engineers, marketers, accountants, lawyers, and executives
Honestly, I would expect much better from you. I’m an engineer by education, and I currently use AI to do most of my accounting, marketing, finance, and legal. Maintaining strong engineering capability requires both product and process expertise, and manufacturing is required to maintain product and process expertise. Without manufacturing, one’s product and process technical expertise begins to fade.
America has been massively whored by Wall Street and our politicians, and most of our corporate executives have contributed to the country’s demise due to their lack of economic knowledge on how the world truly works.
Regarding tariffs, a good place to start is to impose equal tariffs on each country that places tariffs on America’s products. I personally believe there is a place for additional tariffs, provided they are implemented with precision and a specific purpose. Blanket tariffs in mass are counterproductive and do not achieve the desired objective.
The perfect example of counterproductive tariffs are tariffs on spirits. The current tariffs that have been placed on spirits, e.g., French wine and tequila from Mexico, are resulting in massive economic pain on America’s bourbon industry, the American spirit. Bourbon plants are closing, many people are losing their jobs, and several American bourbon businesses are going through foreclosure.
I would close by saying, if you have any way of getting to President Trump, or someone close to him: his tariffs on spirits are the height of stupidity and bringing massive pain to America’s bourbon industry.
I appreciate the opportunity to share my thoughts!
Porter Comment: Steve – Nice to hear from you. I appreciate your note. I don’t think your experience or your examples contradict anything I’ve written or believe about free trade or its advantages.
I applaud your engineering skill and knowledge. My older brother, Mills Stansberry, is a professional engineer and has been building giant turbines for GE for 30 years.
What I would tell you is this: tariffs won’t achieve the things you believe they will. All they will do is raise costs. Increasing the cost of production won’t make America (or the U.S. manufacturing base) more competitive and thus will not lead to more manufacturing here.
If you’ll forgive me, while I haven’t spent my life building factories and studying engineering, I have spent my life building financial and economic models and studying all that can be known about the same.
Comparative advantage (aka free trade) is the one proposition in all of social science that is both true and non-trivial. In fact, comparative advantage is mathematically undeniable. Even if you assume labor is the only factor, the math shows that specialization always pushes the production possibility frontier (“PPF”) outward. It is the closest thing economics has to a “law” of physics.
Why this is hard for some people to believe is that they’re not factoring opportunity costs into their thinking.
Even if the United States is better at making both airplanes and t-shirts than a developing nation, the U.S. “pays” more to make t-shirts because every hour spent sewing is an hour not spent building high-value airplanes. By outsourcing the shirts, the U.S. “buys” more time for airplanes, and both countries end up with more total goods. But nobody sees this opportunity cost.
While the theory is 200 years old (pioneered by David Ricardo), there are endless real-world, modern examples of how these factors play out in the real world.
There are no examples of countries that have used tariffs to grow wealthier than their free-trading partners.
Japan is a wonderful, modern example. Don’t you recall how, in the 1980s, our politicians were demanding that we place tariffs on Japanese products because if we didn’t, they would soon buy our entire country? How’d that work out?
On the other hand, the massive, worldwide reduction in tariffs after WWII via GATT (now the World Trade Organization) coincided with the greatest period of global wealth creation in human history.
And when countries like China (1978) or India (1991) shifted from autarky (self-sufficiency) to open trade, their GDP growth rates accelerated exponentially.
Your idea that America “should” invest in its manufacturing base to build an entire car might sound reasonable and important to you, but, in fact, if such industrial capital allocation was efficient, then it wouldn’t require coercion (tariffs, industrial policy) to exist. You wouldn’t have to convince capitalists to build it. In seeking out the highest returns, they would do so freely.
The simple fact is, many other countries are better than we are at doing certain things. Letting them do those things, while we specialize in others, has allowed America over the last 75 years to become the largest, richest, and most militarily dominant country in all of recorded history.
I would tread lightly on that formula. After all, when the folks in D.C. begin to tell us where to sow and when to reap, we will all soon starve.
If you believe that America should have a manufacturing base, my suggestion is simple: go build it.
Regards,
Porter
“Why Don’t You Run For President?”
Buddy C. writes:
Since you have it all figured out and free trade is the answer to America’s success, why don’t you run for president and correct what is wrong?
Porter Comment: Bud —
Just to be clear, I didn’t “figure this out.”
And I’ll repeat a bit of what I said to Steve, above… Comparative advantage is the one proposition in all of social science that is both true and non-trivial.
The overwhelming advantage to free trade (comparative advantage in econ speak) is the single most-studied, most-tested, and best-understood theory in all of economics. In fact, comparative advantage is mathematically undeniable. Even if you assume labor is the only factor, the math shows that specialization always pushes the production possibility frontier (“PPF”) outward. It is the closest thing economics has to a “law” of physics.
Why this is easy for politicians to ignore and lie about is because of the “unseen” element of tariffs:
Nobody sees the tariff on their bill. It’s passed along in the form of higher prices.
Nobody sees the opportunity cost. Even if the United States is better at making both airplanes and t-shirts than a developing nation, the U.S. “pays” more to make t-shirts because every hour spent sewing is an hour not spent building high-value airplanes. By outsourcing the shirts, the U.S. “buys” more time for airplanes, and both countries end up with more total goods. But nobody sees this opportunity cost.
While the theory is 200 years old (pioneered by David Ricardo), there are endless real-world examples:
The massive, worldwide reduction in tariffs after WWII via GATT (now the World Trade Organization) coincided with the greatest period of global wealth creation in human history. And, when countries like China (1978) or India (1991) shifted from autarky (self-sufficiency) to open trade, their GDP growth rates accelerated exponentially.
As for why I don’t run for office… does it seem like I’m cut out for public service?
Regards!
Porter
Tell me what you think: [email protected]
Good investing,
Porter Stansberry
Stevenson, Maryland
There are three tiny contractors poised to scale exponentially off of Trump’s most recent national security order.
And a legal mandate at the center of it – one that’s creating forced demand for a set of highly-specialized contractors.
Due to geopolitical tensions, the war in Iran, and the trade war with China this situation is accelerating at an unprecedented rate.
And J.D. Vance just revealed that the U.S. government could funnel as much as $100 BILLION into this private sector initiative.
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3 Things To Know Before We Go…
1. Morgan Stanley projects private-credit default rates could hit COVID-era peak. The leading investment bank is forecasting that private-credit defaults could hit 8%. This comes a month after global bank UBS forecast defaults could reach 15% in a worst-case scenario – driven by significant holdings in software loans, which carry the highest leverage of any major sector in the private-credit universe.
2. Oil prices rise with energy infrastructure in the crosshairs. Last night, the Israeli air force bombed the South Pars fields, Iran’s largest gas plant, responsible for 75% of its natural gas production. In response, Iranian media published a list of retaliatory targets that include some of the largest petrochemical plants in Qatar, Saudi Arabia, and the UAE. This marks a significant escalation in hostilities, as both sides in the conflict had previously held off striking energy infrastructure. Crude-oil prices have climbed toward $100 per barrel, as attacks on energy infrastructure risk turning a temporary energy shortage into a prolonged disruption.
3. The Fed stands pat on rising inflation. This morning, the Bureau of Labor Statistics reported that its producer price index (“PPI”) – a measure of wholesale price inflation – surged 3.4% year-over-year in February, versus Wall Street expectations of just 3%. This report is based on pre-Iran-war data, not capturing the oil-price surge from below $70 per barrel to near $100 now. So it was little surprise that the Federal Reserve voted 11-to-1 to hold interest rates steady (in a range of 3.50% to 3.75%) once again this afternoon. However, it’s also worth noting that despite rising inflation, the Fed is not currently planning to raise rates in 2026, with most members still expecting a rate cut later this year.
Chart Of The Day… Mitsui & Co.
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