WSJ.com (07/10/2018) - Good riddance to low-margin businesses. The U.S. invests up the margin chain.

An extra two grand for a Harley Hog because of steel tariffs? We can’t be wimps in the world of trade, but tariff wars are never good. I would know: I was in the middle of one. In the mid-1980s, when Donald Trump was in casino mode and hosting prizefights, the Japanese were knocking out U.S. memory-chip makers. Hitachi instructed salesmen to “quote 10% below their price. If they requote, go 10% again. Don’t quit until you win.” The company later claimed it was never official policy, but the Japanese controlled 90% of the market for some crucial chips. Something had to be done, right? Well, no. Bear with me.

In early 1986, President Reagan’s Commerce Department cited Section 301 of the Trade Act of 1974 and ruled that the Japanese were selling chips below cost. The administration threatened dumping duties of up to 146% on Japanese memory chips. Never mind the oversupply and industry recession. To avoid duties, Japan came to the table and signed an agreement to limit exports and increase U.S. market share in Japan. Sounds like the current tariff tiff with China?

Here’s where things got weird. The chip recession continued, and the Japanese didn’t live up to the agreement. At the time, I was a 20-something Wall Street analyst, way over my head, running around the world tracking all this. In early 1987, I figured out the U.S. government was going to do something big: impose duties on computers, TVs and other products that use chips. I alerted every investor who would listen, but no one seemed to care. At a boxing match I met a reporter from the New York Times. I laid out the whole story to him. (Sorry, I didn’t know anyone from the Journal at the time.) He told me it wasn’t his beat but he’d look into it.

Sure enough, the Times ran a front-page story quoting me. And another the next day. I was sitting in my office, probably playing Tetris on my computer, when a producer from Ted Koppel’s “Nightline” called. I remember it went something like this: “I know you are very busy, but I was hoping we could send over a camera crew to talk about dumping.” I didn’t know much, but I was the expert! I thought of a good quote before they came. The interview lasted 30 minutes, but one line made it to national TV: “We can’t be wimps in the world of trade.”

I still believe that’s true, but duties and tariffs are a fool’s game. Memory chips are a notoriously low-margin commodity business. Intel got out of the memory business. So did AT&T . I’m still not sure why it was making chips in the first place.

Getting out of the dynamic random-access memory market, which Japan was dominating, was the best thing that ever happened to U.S. semiconductor industry. Intel focused instead on high-margin microprocessors—the 386, 486 and Pentium. Silicon Valley turned fabless: We’ll design (high margin), and they’ll manufacture (low margin). We think, they sweat. It’s the “Designed by Apple in California. Assembled in China” label.

Memory prices rose as oversupply cleared out and PCs started growing again. Surprise, markets work! Seven months after its initial 301 announcement, the Commerce Department meekly announced that Tokyo was no longer dumping and the duties were canceled. Over time, the Japanese lost market share to Korea, especially Samsung. China is now taking share. Who cares? Good riddance to low-margin businesses, awful uses of capital. The U.S. invests up the margin chain.

That’s the fallacy of today’s tariff war with China: It is meant to save jobs but ends up destroying better ones. By now, it feels like every Chinese import save iPhones are subject to tariffs under Section 301. As President Trump said in February, “I want to bring the steel industry back into our country. If that takes tariffs, let it take tariffs, OK? Maybe it will cost a little bit more, but we’ll have jobs.”

But not all jobs are equally desirable. It’s profits, not sales, that create wealth. We should invest along the productivity fabric. Jobs for jobs’ sake destroys wealth. Saving Detroit was a mistake. Should Nike shoes really be made in Oregon?

I’m with the National Economic Council’s Larry Kudlow. The U.S. should seek “zero tariffs.” Even if China has 25% tariffs, ours should still be zero. I get that the administration, driven by Trump adviser Peter Navarro, is negotiating with China. But many of the products subject to tariffs shouldn’t be made in the U.S. anyway. Not being wimps means throwing China out of the World Trade Organization or negotiating a free-trade deal.

Tax cuts create, tariffs destroy. The “new Nafta” looks OK but is hardly free trade. The market will determine which jobs to keep and which to toss to the sea. Mercantilism has failed again and again, from British Corn Laws to Japanese chips. Show me the margin. That’s where jobs, and Hogs, will be created.

Read more at https://www.wsj.com/articles/lessons-from-an-80s-trade-war-1538950192