Trump's Tariffs Hit US Economy

Three months ago, when US First Quarter GDP data was released, I wrote that it would be tempting to blame the fall of 0.3%, on Trump's economic policy. Tempting, because, for one thing, its what Trump would do. But, it would be superficial, opportunistic and wrong. As I set out, the fall was basically statistical, as US companies rushed to import the things they needed ahead of the introduction of Trump's proposed tariffs. The surge in imports is what caused the statistical fall in US GDP, just as, for Britain, the surge in exports, to the US, during that period, of things like Jaguar cars, created a statistical increase in GDP. Both would inevitably be reversed in future quarters, and now they have.

Proving the point in the original post, Trump has, now, claimed that the bigger than expected rise in US GDP, in the second quarter, is a sign of the success of his economic policies. Its not, its just that, having filled their boots, in the first quarter, by bringing forward their imports of goods, to avoid Trump's tariffs, US companies are able to just run down those inventories rather than bringing in additional imports. Its that consequent drop in imports, which has led to a statistical rise in US GDP, for the second quarter, just as its concomitant, a fall in UK exports of Jaguar cars to the US, has led to a statistical drop in UK GDP.

In coming months, US companies, having run down inventories, will again have to resume their normal level of imports, and other countries will resume their normal level of exports to the US. Except, of course, that, now, although the ridiculous levels of tariffs that Trump had first announced, which would have quickly wrecked the US economy, have been reduced to around 15%, those tariffs are still much higher than they were prior to Trump. A look at the US GDP data over the last 6 months, averaging out the effects of the bringing forward of imports, gives an indication, however, of the effect of Trump's tariffs on the US economy. Despite the claims of Trump, and some of his fanboys such as Piers Morgan and Nigel Farage, its not good.

The average over the six months is 1.25%. That compares very badly with the average of more than 2.5% in the last year of Biden's Presidency. It compares even worse with the average US growth rate since WWII of around 3%. The effect of Trump's economic policies, the uncertainty created and so on, is already hitting the US economy. In the first quarter, imports surged by 37.9%, but only fell back by 30.3%, in the second quarter, as those inventories were run down. In coming months, as those inventories are run down further, imports will rise further. But, we are also, now, beginning to see how this will play out in other ways, as I have described previously.

Tariffs are a tax, and like all taxes, they ultimately represent a deduction from surplus value, i.e. from profits. So, Trump's government has sucked in additional revenues from these taxes, but the taxes have simply reduced the profits of US companies. They have not, as Trump and his followers claimed, been paid by foreign countries. The actual process by which those tariffs/taxes get deducted from profits depends on a series of other conditions. For example, if companies are able to just raise their prices to recoup the amount of the additional tax/tariff, the hit to their profit is not immediately seen. Whether they can increase their prices depends upon whether there is sufficient liquidity in the economy to facilitate such a general price rise by all companies. If not, then it depends upon the price elasticity of demand for different commodities. In short, some companies would be able to raise prices, if consumers continued to demand their products, despite the higher price, but, then, those consumers divert spending from other products, causing their demand to fall sharply, and causing companies, in those spheres, to take a bigger proportional hit to their profits.

Ultimately, that would mean capital would grow more slowly in, or even leave, these badly hit sectors of the US economy, and grow more rapidly in those sectors where profits had not been so badly hit. But, then, this increase in supply in these sectors would cause their prices to drop, and their profits along with it. The fall in supply of commodities in spheres where capital leaves would cause prices of those commodities to rise again. Its what Marx describes in Capital III, and elsewhere, of how disparate rates of profit get averaged out. The end result is that profits overall get reduced by the amount of the tariff/tax.

However, central banks exist to protect the interests of capital, including the effects on profits. So, they tend to create conditions whereby any cost increases for companies can be passed on in price rises. Its one reason that Trump is desperate for the Federal Reserve to cut its policy rates, and keep liquidity plentiful. The other reason is that lower interest rates boost asset prices, and Trump has his focus sharply on the stock market, and property market. But, then, any such rise in prices means that the cost of living for workers rises, i.e. the nominal value of labour-power. In conditions where labour-power is plentiful, companies can get away with not raising wages. They can pay wages that are below the value of labour-power. Over the long-wave cycle, however, that gets evened out, as with the movements of market prices of all commodities. In the course of the cycle, a surplus of labour-power gets turned into a shortage of labour-power, and, then, wages rise above the value of labour-power. We are in this latter phase.

In the 1980's and 90's, there was a large surplus of labour-power, as the microchip technological revolution massively raised productivity. But, by the 2000's, that was starting to unwind. Despite continued attempts, particularly after 2010, of states to restrict economic growth, so as to slow the demand for labour and capital, and so to limit the rise in wages and interest rates, the relative surplus population has been shrinking. In those conditions, it becomes impossible for capital to simply raise prices without there being a consequent rise in wages. Companies raise prices, but, to attract and retain workers, they have to pay higher wages, so that what they gained in their profits from the higher nominal prices, they lose in the subsequent rise in nominal wages. It just takes longer to play out, and, also, leads to the potential for a price-wage spiral.

That can be seen in the US jobs and wages data. The average initial weekly jobless claims is around 220,000 on a four-week moving average. That compares with a level of around 400,000 when the US is entering a recession. The latest non-farm payroll data showed a sharp slowdown in the number of new jobs being created, but still not a fall in employment levels.  In part, the slowdown reflects the damage done by Trump's tariffs, but also his other main policy, the attack on migrants.  A sharp drop in the total labour supply, mostly of migrant workers, itself, contributes to a slow down in employment.  That is also seen in the fact that, average hourly earnings are rising faster.

Bourgeois economists and financial pundits, most of whom are not old enough to have witnessed this kind of phase of the long wave cycle, before, but which occurred in the 1950's, 60's and 70's, take the conditions of the last 30-40 years as being normal, and more or less eternal. So, their starting point is that workers can never be able to raise their wages to compensate for these rising prices. Indeed, various catastrophists on the Left have a similar view, reminiscent of the likes of Proudhon, or of the Lassallean Iron Law of Wages. So, we had all sorts of predictions, as inflation spiked after the ending of lockdowns, that there would be the biggest drop in real wages ever seen. It didn't happen. In fact, real wages rose sharply, and in some spheres, where there were acute labour shortages, they rose particularly quickly. That doesn't mean some at the very bottom haven't seen their position deteriorate.

The concomitant of this view that workers could not raise their wages was that they would not be able to consume at the same level, and so, demand would fall, so companies would not need so many workers. That would take the pressure of wages, and also, reduce interest rates, so boosting asset prices. But, workers have not reduced their consumption, as prices rose. In part, they had savings built up over lockdowns, which they could draw on. Its also the case that, as interest rates rose, providing anything up to 6% on savings, compared to the near zero rates before that, those with savings saw a not insignificant rise in their income from interest, available to spend. But, also, the fact that firms saw a large rise in demand following lockdowns, meant they had to employ more workers, and the demand for labour caused wages to rise.

At the very least, as I've set out previously, households, if not individuals, saw a rise in incomes as more of them were employed, more had longer hours of employment, overtime and so on, and so more to spend. But, it was also clear that many saw their individual wages rise too. At first the largest component of that was of workers getting higher paid jobs by moving employer. The average rise was around 14% compared to just a 7% rise in wages for workers staying with the same employer. So, workers continued to spend, firms continued to need workers to meet the rising demand.

The latest US jobs data and spending data shows that, as the number of initial jobless claims remains at historically low levels, and wages continue to rise. Similarly, consumer spending remains high, so that firms continue to need to expand and employ more labour, or else lose out to their competitors. The main relative losers have been workers employed by the state, but as seen in Britain in the last couple of weeks with doctors, nurses and other NHS staff, that ultimately catches up too, as those workers demand pay rise to compensate for what they have previously lost out on. Its not as though the NHS is being inundated with job applications!

So, the effects of Trump's tariffs, as with any other tax, are to reduce the profits of US companies. Of course, what Trump has hoped for is that the US is such a big economy, and market for the exports of other countries that, rather than see the sales of their products fall, foreign companies would “eat” some of the tariff themselves, by reducing their prices to the US, and, so reducing the profits of those foreign companies. But, the experience of the last 6 months showed that that didn't happen. The US economy is definitely very big, but most of what it consumes, it also produces itself, as with other large economies such as China and the EU. So, as I have set out before, the US is China's biggest export market, but it still only accounts for around 6% of Chinese exports and 2.5% of Chinese GDP. So, Chinese exports to the US, on average, can fairly easily be diverted to other markets, not least its own domestic market, and the same applies to the EU, and other large economies. The only economies not able to do that, are the small isolated economies, like Britain.

So, exporters from these larger economies are not so dependent on the US market as to need to “eat” some of Trump's tariffs out of their own profits. The main burden falls on US companies whether immediately, or as a result of higher costs, including higher wages, as they pass through the system. Its why Trump has had to repeatedly chicken out on his proposed tariffs, as the threats were seen as empty. The so called “trade deals”, such as that with the EU, agreed when Trump was in Scotland, are nothing of the sort. Even though Trump never imposed his proposed 50% or 35% tariffs on the EU, and ended up with a figure of 15%, he still didn't get what he wanted, and seems not to have understood what the deal entailed, reminiscent of Boris Johnson.

Trump thought that the EU had agreed 0% tariffs on US imports. They hadn't. They only agreed 0% on some goods. In short, as with the “deals” Trump did with Starmer and others, its basically just a superficial, publicity stunt, and the details can be scrapped at any minute, and probably will. Trade deals take years to negotiate, and require putting into law by respective legislatures. Trump wanted to save face, and the EU gave him the opportunity to do so. Even so, many EU states are unhappy with how Von Der Leyen performed. The consequence is likely to be, as I said at the start of the year, that the EU will simply shift more of its trade to being with China and Eurasia, and less with the US. The US will simply face the higher costs resulting from the Trump tariffs, and a consequent hit to US company profits.

One consequence, already seen is that, if we take a car maker based in Europe, be it Jaguar or Ford, they will face 15% tariffs on their exports to the US. But, Trump has imposed 50% tariffs on a range of raw materials imported into the US. So, for example, a Jaguar or Ford produced in the US, will see the cost of various raw materials such as steel, copper and so on, used to produce the car rise by 50%. That makes the US produced car more expensive, even after the 15% tariff, than the same car, produced in Europe, Japan etc., and imported to the US! That is clearly not what Trump sought to do, but he's ended up in that idiotic position, because he has just plucked a tariff level out of the air, which can change from day to day, and because he has wanted to shore up his dwindling support amongst MAGA, by trying to protect US coal, steel and other primary product producers.

The early indications, therefore, are that Trump's tariffs are hitting the US economy causing a deterioration in growth compared to the Biden regime, which itself was lacklustre. The main hit is going to be to US profits. That will first likely be felt in the profits of retailers like Wal-Mart that are huge importers of manufactured goods. Next will be US manufacturers that face higher costs of imported raw materials and components. Both will “eat” some of the higher cost out of their profits. Mostly, what will not immediately be hit are services companies, and, of course, that includes the huge tech companies. However, as the higher costs caused by the tariffs work their way into the rest of the economy – higher prices for steel, copper and so on, feed into the costs of producing cars, and electrical appliances, for example – so US prices, as a whole will rise, no doubt facilitated by the provision of liquidity by the Federal Reserve. This rise in prices is never a single event, but a rolling process, coming in waves. One price that will also rise, therefore, in conditions of tightening labour markets, is the price of labour-power, and as relative wages rise, so US profits as a whole will be hit.

Anti-Duhring, Part II, Political Economy. II – The Force Theory - Part 7 of 9

When the nobility lost its social function, the bourgeois ideologists argued that there was no basis for the continuation of its revenues, i.e. ground-rent, which was a drain on profits, and so on capital accumulation. If land was nationalised, the bourgeoisie argued, the state would be the recipient of such rent, thereby, reducing its need to levy taxes to cover the cost of its expenses. In Theories of Surplus Value, Marx notes that this same idea was, then, put forward by some early working-class representatives, in relation to the payment of interest. As Marx notes, however, whilst the state could be the provider of loanable money-capital, and recipient of interest, the fact that this would displace the remaining function of the ruling-class is tantamount to the end of capitalism itself, an eventuality that the ruling-class would be bound to resist with all its means.

When the industrial bourgeoisie arose as an entirely new class, and alongside it the industrial proletariat, this occurred, not as a result of some deliberate plan or of conscious will, but spontaneously, as a consequence of purely economic processes. Serfs and retainers who moved to the towns, in the Middle Ages, needed to provide a living for themselves, and so became small, independent commodity producers and traders. Of itself, as Lenin describes, and also, Marx describes in Theories of Surplus Value, this leads to an expansion of the market, alongside which goes a growing social division of labour, and the realm of exchange-value. A market means competition, and competition means winners and losers – a differentiation into an urban bourgeoisie and proletariat.

But, as Marx sets out, in Capital III, the same applies to the social function of the private capitalists, and their expropriation by socialised capital, as the collective property of the workers. Competition leads to the creation of small private capitals, which expropriate the independent commodity producers.  The small private capitals are expropriated, as a result of the same process, by larger private capitals, but these are, then, swallowed by the huge socialised capitals – the expropriation of the expropriators. The private capitalists are driven out to become mere coupon-clippers, owners of fictitious-capital, again, simply as a result of these economic processes. They become redundant, and a drag on the further development of capital, but, just as formerly, with the nobility, they cling to their control of the political regime, and use it to protect their position, thereby, damaging the further rational development of capital. The economic relations have outgrown the political/juridical relations, which must be resolved by a political revolution.

“... this result established itself with irresistible force, against the will and contrary to the intentions of the bourgeoisie; its own productive forces have grown beyond its control, and, as if by a necessity of nature, are driving the whole of bourgeois society towards ruin or towards revolution.” (p 211)

The bourgeoisie, as ruling-class, in those first developed economies, was, by its nature, a national bourgeoisie, and the state it created was a nation state. But, by the end of the 19th century, the capital was large-scale, socialised capital, formed into large oligopolies, trusts and corporations. On the one hand, as described in Capital III, this required intervention and regulation by the capitalist state, for the benefit of capital, and of society as a whole. On the other hand, the huge scale of this capital, and its long time horizons for investment, requires the planning regulation and standardisation within each enterprise to be extended to the economy as a whole, a function which only the state could perform.

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Anti-Duhring, Part II, Political Economy. II – The Force Theory - Part 6 of 9

The consequence of this social position of the bourgeoisie was that its ideas pervaded society. Its ideas, indeed its members, increasingly occupied the functional roles in the state itself, in the churches, the universities, schools and colleges, in the newspapers, as well as the permanent state bureaucracy. Even as the nobility occupied the political regime, represented by the Court or Parliament, the state, itself, became a bourgeois state, whose future depended upon the free and rapid development of capitalist production.

“The burghers' revolution put an end to this. Not, however, by adapting the economic situation to the political conditions, in accordance with Herr Dühring’s principle—this was precisely what the nobility and the crown had been vainly trying to do for years—but on the contrary, by casting aside the old mouldering political rubbish and creating political conditions in which the new “economic situation” could continue and develop.” p 210)

And this, of course, is why Marxists viewed the bourgeois-democratic, national revolution, of the 18th and 19th century, as progressive. Not because of any liberal, moralistic belief in bourgeois-democracy, or the right of national self-determination, but, solely, because, at that time, the bourgeois-democratic nation state represented the rational form required, as a minimum, for this free and rapid development of capitalism. And why did Marxists see that as progressive, and, therefore, to be desired? Because it brought with it the development, also, of the industrial proletariat, and of the development of the productive forces to a level whereby Socialism becomes possible.

“And it did develop brilliantly in this political and legal atmosphere suited to its needs, so brilliantly that the bourgeoisie has already approached the position held by the nobility in 1789: it is becoming not only socially superfluous, but a social hindrance; it is increasingly abandoning productive activity, and, like the nobility in the past, increasingly becoming a merely revenue-pocketing class;” (p 210)

The significance of this can be seen by comparing the actual transformation of the bourgeoisie into this merely "revenue-pocketing class", i.e. coupon-clippers, as against Marx's description of the nature of capital itself, in Capital III, Chapter 15.

“And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

The ruling-class, as a class, now, of "revenue-pocketing", coupon-clippers, financial gamblers, as owners of fictitious-capital, no longer represent the interests of capital itself, and represent a fetter on its further development.  I have, previously described the significance of this, and Engels sets it out, also, at the end of his book. By the end of the 19th century, this process, by which the bourgeoisie had become a socially superfluous, revenue-pocketing class, was more or less complete. The role of functioning capitalist had been taken over by a growing army of middle-class, professional managers, technicians and administrators, drawn from the ranks of the working-class, and facilitated by the expansion of “free”, public education. Individually, they owned no capital, even as they managed ever larger masses of it. The industrial capital, itself, in the form of cooperatives and corporations, became socialised capital, which is, objectively, the collective property of the associated producers within the company (the workers and managers).

The ruling-class, like the nobility before them, no longer had a social function, but clung to their position as ruling-class, and control of the state. Their role became one of simply money-lenders, owners of fictitious-capital – shares and bonds – from which they derive interest/dividends and speculative capital gains. As Marx describes, in Capital III, this fictitious-capital, and consequently the ruing-class, itself, now stands in an antagonistic relationship to the real capital, and, consequently, to the capitalist system itself! It acts as the nobility did before it, like a succubus, draining the lifeblood from capital via its revenues, which it uses unproductively, and even destructively, as it fuels speculative asset price bubbles, which subsequently burst.

The swelling middle-class of professional managers, technicians, administrators and bureaucrats have their equivalents in the trades unions and social-democratic parties, as well as in the ranks of the permanent state, be they as civil servants, teachers, lecturers and so on. The ideas arising from these new economic forms and social relations, and represented by the social function of this new middle-class strata, are those of social-democracy, as defined by Marx in The Eighteenth Brumaire.

“The peculiar character of social-democracy is epitomized in the fact that democratic-republican institutions are demanded as a means, not of doing away with two extremes, capital and wage labour, but of weakening their antagonism and transforming it into harmony.”

It takes as its basis, in the 19th century, the Ricardian notions of the identity of interest between capital and labour, requiring only a negotiation, between the two, over the distribution of the spoils, but, always assuming the primacy of capital. This bargaining role is the social function of the middle-class layer of managers on the one hand, and the trades union bureaucracy on the other.

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Anti-Duhring, Part II, Political Economy. II – The Force Theory - Part 5 of 9

As Engels describes, those bourgeois commodity producers, in the towns, were not some continuation of the old ruling feudal class, but were from some of those layers of the old society most oppressed by it, the “serfs and villeins”. The bourgeoisie arises, in the towns, as capitalist production begins there from the 15th century onwards, because, out of this mass of independent commodity producers, a process of differentiation, driven by competition, produces the two entirely new classes of modern society – the industrial bourgeoisie and industrial proletariat. Lenin describes, precisely, this process, and shows why it only extends into agricultural production at the end, in his polemics against the Narodniks, for example, “On The So Called Market Question”, and most comprehensively in “The Development of Capitalism In Russia”.

Secondly, and related to the first point, is that capitalist production is not only premised upon existing commodity production and exchange, but on the existence of sufficiently large markets for those commodities, so as to make large-scale, capitalist production worthwhile. Where do those large markets come from, if there is continued large-scale direct production, by peasants, who simply meet their own needs? Thirdly, the idea of clearing the land to turn over to sheep, itself, confuses the supply of a commodity – wool – with capitalist production. It confuses commodity production and exchange, which existed for at least 7,000 years, before capitalism, with capitalist production itself.

As Marx notes in Theories of Surplus Value, during all that previous history of commodity production, there were failures of commodity producers, but they then became debt slaves, serfs or paupers, not proletarians, not industrial wage-labourers. It is only when the growth of the towns results in an expansion of the market that capitalist production, i.e. production on a larger-scale, to meet that demand, becomes possible. It is the larger-scale of production that makes capitalist production more efficient, enabling it to grab market share, and so, now, the failed commodity producers become wage-labourers, and their means of production become capital in the hands of their new employers.

Far from the bourgeoisie arising as the pet or protégé of the existing ruling class, it had to develop in combat with it, and, as Marx and Engels note, in this process of class struggle, at first, it does this with the active support of the industrial proletariat it brings into existence alongside it.

“The struggle of the bourgeoisie against the feudal nobility is the struggle of town against country, industry against landed property, money economy against natural economy; and the decisive weapon of the burghers in this struggle was there resources of economic power, which were constantly expanding through the development of industry, at first handicraft, and progressing, at a later stage to manufacture, and through the spread of commerce. Throughout this struggle political force was on the side of the nobility, except for a period when the crown played the burghers against the nobility, in order to keep one estate in check by means of the other; but from the moment when the as yet politically powerless bourgeoisie began to grow dangerous owing to its increasing economic power, the crown resumed its alliance with the nobility, and by so doing called forth the bourgeois revolution, first in England and then in France.” (p 209)

This illustrates another important point, as also, set out by Lenin, in his polemics against the Narodniks. As Engels notes, in relation to France, as the classic example, the political regime had remained unaltered, with the old nobility still in control, but, despite it, the economic relations had changed, and outgrown it.

“In terms of political status, the nobleman was everything, the burgher nothing; but in terms of the social situation the burgher now formed the most important class in the state, while the nobleman had been shorn of all his social functions and was now only pocketing his revenues in payment for those vanished functions.” (p 210)

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