Why Invest in America?

Hyundai’s U.S. splurge is an endorsement of the American economic system, not proof that “tariffs work”.

This sounds like good news, and I’m confident that it is:

South Korean carmaking giant Hyundai has unveiled $21bn (£16.3bn) of investment in the US just days before President Donald Trump is set to impose new tariffs on trading partners.

The plan includes a new $5.8bn steel plant in the southern state of Louisiana.

Hyundai also said it will expand its American vehicle production and invest billions of dollars in new technology including autonomous driving and artificial intelligence (AI).

“This investment is a clear demonstration that tariffs very strongly work,” Trump said during the event at the White House on Monday.

There are a couple of flaws in the President’s assessment.

First, multi-billion dollar capital outlays are not formulated and approved in the space of a few weeks, nor are they premised on what is likely to be a very short-term shift in U.S. trade policy. Tariffs are unpopular, and the President himself has said repeatedly that his goal is to cudgel other countries into agreeing to reciprocal reductions in trade barriers. If Hyundai executives are placing a $21 billion bet that the Trump tariffs will endure, they would have done better to put their shareholders’ money on red or black.

The sensible reason to build steel mills and auto plants in the United States is the expectation of a higher return on investment than is available elsewhere. Much as we may bemoan gargantuan budget deficits and irresponsible politicians, our country is still a pretty good place to do business, particularly when compared to the dirigiste economies, high taxes, inert bureaucracies, unproductive work forces and petty corruption endemic to so many other lands. That is why Hyundai wants to expand operations here.

But let us suppose that U.S. tariffs are the motivating factor. If so, the implication is that production in the U.S. consumes more resources than production somewhere else, that “made in America” means getting less output for the same inputs of labor and raw materials.

If that sounds abstract, consider an analogy.

Greenland gains its independence. Its new president, taking Donald Trump as his inspiration, resolves to Make Greenland Great Again by attacking the country’s enormous trade deficit in agricultural projects. Greenland has not a single orchard; all of its apples, oranges and pears are imported! To stop the Orange Counties (Florida or California) from ripping off Nuut, the president imposes a high enough import levy to make it profitable to plant orchards in greenhouses lit year-round by artificial sunlight.

Greenland thus would have home grown fruit. Does anyone imagine that the project would be a good deal for the Greenlanders?

Factories that rely on tariffs for their viability aren’t quite as absurd, but they are not a road to riches.