American Producers Were Set Up To Lose
Part of the “To Boldly Go” Austrian Economics Series
The trade war debate produces a lot of heat and very little light — mostly because it focuses on the wrong variable. The standard analysis compares Chinese wages to American wages, finds a large gap, and concludes that the solution is tariffs. This analysis is incomplete in ways that make the proposed solution not just ineffective but counterproductive.
The playing field isn’t tilted at one point. It’s tilted at six simultaneously. Tariffs address one of them, partially, while leaving five others untouched — and the five they leave untouched collectively exceed the one they address.
Let’s count the tilts.
Tilt 1: The Cost Structure Advantage
Before a single tariff is imposed or evaded, the Chinese producer operates under a cost structure that the American producer cannot access through any combination of efficiency and effort.
State-subsidized energy costs in China’s manufacturing zones run at rates that no American producer competes against through market pricing. The electricity that runs an American factory is priced to recover the cost of generating and delivering it plus a regulated return on capital. The electricity running a Chinese manufacturing zone is priced to attract and retain manufacturing — a strategic subsidy that doesn’t appear in the product’s price but is embedded in every unit produced.
State-directed credit at below-market rates channels capital to strategically designated industries at interest rates that reflect policy priorities rather than commercial risk. The American manufacturer borrowing to expand capacity pays the market rate for capital. The Chinese manufacturer in a designated strategic sector pays the policy rate — often dramatically lower.
Environmental compliance costs are real in the United States and selectively enforced in Chinese manufacturing zones. The American steel producer pays the full cost of its emissions compliance. The cost differential doesn’t appear as a subsidy — it appears as a competitive advantage in the final product price, externalized onto the global environment and onto the American competitor who bears costs the Chinese producer doesn’t.
Tilt 2: The Full Employer Cost — What the Wage Comparison Misses
The trade analysis that compares Chinese manufacturing wages to American manufacturing wages is comparing the wrong numbers. The relevant comparison is total employer cost — and the gap between wage rates and total employer cost is substantially larger in the United States than in China.
For every American employee, the employer pays:
Federal mandates: FICA matching at 7.65% of wages — 6.2% Social Security plus 1.45% Medicare — paid entirely by the employer, invisible to the employee who sees only their own contribution. Federal unemployment insurance on top. On a $25/hour worker, the FICA match alone adds $1.91/hour before anything else is counted.
State mandates: State unemployment insurance with experience rating that punishes employers for prior layoffs regardless of economic conditions. Workers’ compensation insurance — mandatory, rate-determined by industry classification — running several dollars per hour in high-risk manufacturing categories. States increasingly adding paid family leave, paid sick leave, and disability insurance requirements that add further fixed costs per employee.
The ACA employer mandate: Companies with 50 or more full-time equivalent employees must provide qualifying health insurance or pay penalties. The employer’s health insurance contribution — typically $6,000-$15,000 annually per employee — translates to $3-7 per hour of additional labor cost on top of wages. The Chinese manufacturer’s workers participate in a national social insurance system at rates that are lower and partly state-subsidized.
The compliance infrastructure: Here is the cost that never appears in wage comparisons and that most employees never see — because it is paid entirely by the employer without appearing on any pay stub. The HR department exists not to produce anything but to navigate federal and state employment law. The employment attorney on retainer. The compliance software. The training programs and their documentation. The OSHA recordkeeping. The EEOC compliance procedures. The I-9 verification system. The wage and hour law compliance varying by state.
A small manufacturer with fifty employees requires essentially the same compliance infrastructure as one with five thousand. The fixed cost of American employment law compliance falls proportionally most heavily on smaller manufacturers — exactly the companies that rebuilding the industrial commons requires.
The result: a worker earning $25/hour costs the employer $31-35/hour in total compensation and compliance burden. The Chinese manufacturer’s equivalent total employer cost is a fraction of that — not because of slave labor, not because of exploitation, but because the American regulatory system has layered genuine worker protections into a compliance architecture whose cumulative cost falls entirely on domestic producers competing against foreign manufacturers who carry none of it.
Tilt 3: The Unintended Consequences of Well-Intentioned Mandates
Frédéric Bastiat identified the core analytical error in 1850: what is seen and what is not seen. The Do-Gooders who designed each mandate were correct that each individual benefit is genuinely beneficial to the workers who receive it. What is not seen is the worker not hired, the business not started, the expansion not pursued — the people who are absent from the economy because the mandates made their inclusion impossible.
The minimum wage cliff: a worker whose productivity to the employer is worth $18/hour cannot be legally employed when the minimum wage plus 40% mandate burden makes their total cost $21/hour. The mandate designed to help low-wage workers specifically excludes the workers whose productivity falls below the mandate’s fully-loaded cost threshold. What is seen: the worker earning the mandated wage. What is not seen: the worker earning nothing because the mandate priced them out of employment.
The ACA cliff at 50 employees: the employer mandate triggers at 50 full-time equivalents, creating a dramatic cost discontinuity at the threshold. The predictable result is businesses deliberately maintaining 49 employees, converting full-time positions to part-time, outsourcing rather than hiring. The mandate designed to extend healthcare coverage incentivizes exactly the workforce structures that minimize coverage. What is seen: workers at covered employers receiving healthcare. What is not seen: the deliberately capped workforce and the deliberately part-time employees at firms managing below the threshold.
The wrongful termination paradox: the litigation risk of terminating an underperforming employee — wrongful discharge exposure, discrimination claim exposure, the EEOC process — creates hiring reluctance that falls most heavily on candidates from protected categories. The employer who knows that terminating a poor performer from a protected group carries higher litigation risk than terminating an equivalent performer from an unprotected group responds rationally by being more reluctant to hire from the protected group in the first place. The anti-discrimination mandate produces discrimination in hiring as the rational response to discrimination in termination’s asymmetric legal risk. What is seen: employment protection for workers already employed. What is not seen: hiring reluctance for the very candidates the protection was designed to help.
The cumulative effect is a labor market systematically biased toward large employers who can absorb what proportionally devastates small employers, toward automation and contractor relationships over direct employment, and toward offshore manufacturing in jurisdictions where none of these compliance layers apply.
The Chinese manufacturer competing for the same market carries none of this. Not because China doesn’t protect workers — it has its own labor law framework. But the compliance architecture, the litigation exposure, the insurance requirements, and the fixed overhead of American employment law represent a structural cost disadvantage that tariffs address at the trade border while leaving completely intact at the production level.
Tilt 4: The Industrial Commons Destruction
The most irreversible tilt of all — and the one that makes rebuilding American manufacturing so much harder than simply announcing tariffs and waiting for factories to reappear.
The industrial commons is the shared infrastructure of manufacturing knowledge, tooling, supplier relationships, and skilled labor that exists not because any single company owns it but because it accumulated over generations of manufacturing activity in specific places. It is tacit knowledge — living in the hands and judgment of skilled workers, in the relationships between suppliers and assemblers, in the institutional memory of communities that have been making specific things for decades.
This commons was dismantled systematically through the 1990s and 2000s as comparative advantage theory was applied without strategic reserve awareness. The factory closed. The toolmakers retired. The process engineers whose knowledge was never documented because it lived in their hands moved on. The supplier relationships dissolved when the anchor manufacturer left. The community college programs that trained machinists stopped training machinists when there were no machinists to train.
This knowledge destruction is not a price signal problem. No tariff reconstitutes dispersed tacit knowledge. You rebuild it — slowly, expensively, through years of training and practice — or you don’t have it. The American producer trying to re-enter a market that China has dominated for thirty years isn’t competing on a level field. They are competing while rebuilding the field from scratch, against a competitor that has been refining its supply chains, its process knowledge, and its supplier relationships for three decades.
The scandium case study illustrates the depth of the problem. China captured rare earth processing through a specific strategy: subsidize below market cost to eliminate Western competitors, wait for the processing expertise to disperse, raise prices once the competition is gone. The Mountain Pass mine in California — once the world’s largest rare earth producer — closed in 2002 when Chinese subsidized pricing made it uncompetitive. The processing chemistry expertise dispersed. Twenty-four years later, 80 tonnes of scandium is produced globally per year, China controls 80-85% of processing, and fighter jets, hypersonic vehicles, spacecraft, and AI data center fuel cells all require Beijing’s export license approval.
No tariff recovers what was lost at Mountain Pass. The expertise, the equipment, the supply relationships, the institutional knowledge of rare earth processing chemistry — these require rebuilding from the ground up. That takes years, requires patient capital that the American financial system is structurally biased against providing, and must be accomplished against a competitor who spent thirty years of state-directed investment refining exactly what needs to be rebuilt.
Tilt 5: The Financial System’s Structural Bias Against Long-Term Investment
The Cantillon effect operates domestically as well as internationally. The financialization of the American economy over the past four decades systematically rewarded capital for extracting value from manufacturing communities and punished the long-term investment that rebuilding industrial capacity requires.
Wall Street rewarded every offshoring decision: lower production costs improved quarterly earnings, which improved stock prices, which improved executive compensation, which enriched the investment banks facilitating the transactions. Every factory that moved to China improved someone’s balance sheet. No one’s balance sheet was charged for the knowledge destruction, the community devastation, or the strategic dependency being created.
Wall Street punished long-term industrial investment through quarterly earnings pressure that makes a five-year manufacturing rebuilding program structurally disadvantageous. The company that announces it will spend five years and significant capital rebuilding domestic manufacturing capacity faces immediate stock price pressure from shareholders who see costs without near-term revenue. The company that announces it will offshore to China to reduce costs faces immediate stock price appreciation. The financial system’s incentive structure is aligned against exactly the investments that rebuilding the industrial commons requires.
The American producer competing against Chinese state-directed capital is competing with private capital that faces quarterly accountability against capital that faces only strategic accountability. The time horizons are incommensurable. Patient state capital building a thirty-year industrial strategy versus quarterly-accountable private capital extracting this quarter’s earnings — this is not a level competition regardless of tariff rates.
Tilt 6: The Tariff That Missed
The administration’s response to the tilted gameboard was tariffs — a price signal at the trade border designed to make Chinese goods more expensive and thereby make American production more competitive. The Austrian framework predicted the outcome before it occurred: the market would find every available routing around the price signal faster than enforcement could follow.
A note on the tariff’s legitimate purpose: the Austrian critique of tariff policy is not that tariffs are never warranted. Emergency measures are sometimes the only available response to structural distortions that cannot be corrected quickly. The logic of the tariff as stopgap is coherent: the playing field is tilted by accumulated bad law, the structural fixes require Congressional action that will take years, a tariff provides temporary partial compensation while the structural work proceeds.
The problem is the second half of that sentence. The structural work never proceeds. Congress doesn’t fix the compliance burden that adds 40% to every American employer’s labor cost. Congress doesn’t rebuild the industrial commons. Congress doesn’t address the financial system’s structural bias against long-term industrial investment. The tariff that was supposed to be temporary compensation for structural problems that were being fixed became permanent additional cost layered on top of structural problems that weren’t.
The American importer now bears three cost layers: the structural disadvantage that justified the emergency measure, the tariff intended to partially compensate for it, and the transshipment routing cost the tariff itself created. Congress has addressed none of the three. The stopgap became the policy. The emergency became the permanent condition.
As if Congress was ever going to fix the underlying laws. The tariff was always going to become just another cost born by American importers. The Austrian framework predicted this too — emergency measures without structural reform don’t fix emergencies. They become part of the permanent landscape the next emergency measure will need to compensate for.
The “Great Transshipment Scam” — the White House’s own term — is the market’s response to the tariff price signal. Chinese exporters routed goods through more than 40 countries, using limited assembly, relabeling, repackaging, and documentation changes to create the appearance of different national origin. A $112 billion gap emerged between China’s reported exports to the United States and arrivals recorded by US Customs and Border Protection. The administration published a 25-page report calling the market’s predictable response to a price signal a crime.
Simultaneously, the de minimis exemption — packages under $800 entering duty-free with minimal customs inspection — was industrialized by Chinese e-commerce companies shipping approximately 4 million individual packages daily into the United States, each duty-free, each competing against American retailers paying tariffs on their imported inventory. It required an appeals court decision to permit the executive branch to remove its own administrative exemption — the legal complexity that well-resourced actors exploit and that poorly-resourced domestic producers cannot navigate.
The tariff addressed the price symptom. The five structural tilts documented above remained entirely intact. Chinese producers are now routing through 40 countries instead of directly — a logistics cost that is presumably less than the tariff it evades. The dependency on Chinese processing for scandium, rare earths, pharmaceuticals, and semiconductors is unchanged. The employer compliance cost burden that makes American manufacturing structurally more expensive is unchanged. The quarterly-earnings pressure that prevents patient capital from funding industrial rebuilding is unchanged. The dispersed tacit knowledge of closed factories is not recovered.
Shooting yourself in the foot doesn’t let you win the race. Calling the other runner’s stride a scam doesn’t level the track.
A Bandaid on a Broken Leg
The tariff as calculated missed a fundamental diagnosis. The trade deficit with China — the figure the tariff was sized to address — is not primarily a tariff problem or a cheating problem. It is fundamentally a strong dollar problem.
The dollar’s status as the world’s reserve currency creates persistent global demand for dollar-denominated assets — Treasury bonds, dollar deposits, dollar-invoiced commodity contracts — that keeps the exchange rate elevated above what American export competitiveness would warrant. Every central bank holding dollar reserves, every oil transaction settled in dollars, every emerging market borrowing in dollars to access global capital creates demand for dollars that has nothing to do with trade flows. The result is a systematic exchange rate premium that makes American exports expensive in foreign markets and makes imports cheap for American consumers — and the trade deficit is the accounting identity that follows.
A tariff applied at the trade border cannot correct a distortion operating at the currency market level. The tariff raises the price of Chinese goods in the American market. The reserve currency premium simultaneously lowers the price of all foreign goods in the American market by keeping the dollar strong. The tariff is pushing against the currency headwind with a price adjustment that the exchange rate partially neutralizes.
The reserve currency status is a privilege and a burden simultaneously. The privilege: the United States borrows in its own currency at rates no other country can access, running persistent deficits that would be unsustainable for any non-reserve currency nation. The burden: the reserve currency premium prices American producers out of global markets in ways that no border adjustment corrects. No administration has been willing to contemplate unwinding the reserve currency architecture because the borrowing privilege is too valuable to the Treasury — which means the trade deficit that the tariff was sized to address will persist regardless of tariff levels, because its deepest cause is the monetary architecture rather than the trade policy.
The tariff compensates partially for some of the tilts on the playing field. It cannot compensate for the tilt in the ground itself.
The trade deficit is not separable from the debt financing relationship it enables. The dollars that flow out to pay for Chinese imports flow back as purchases of Treasury bonds. Without the trade deficit, the United States loses the mechanism that recycles dollars into the debt financing that funds the fiscal deficit. The tariff that was supposed to reduce the trade imbalance was applied by the same administration running the fiscal deficit that the trade imbalance helps finance. The strong dollar that prices American producers off the playing field is the same strong dollar that makes US Treasury bonds attractive to foreign holders. The tilted playing field and the debt financing machine are the same architecture viewed from different angles.
This is why the structural fixes never happen. The system that produces the tilted playing field is the same system that finances the government that would have to fix it. The incentives run entirely against the correction.
The Austrian Diagnosis
The gameboard is tilted not primarily by Chinese cheating but by the accumulated consequences of specific policy decisions that:
Allowed the industrial commons to be dismantled for quarterly earnings without accounting for the strategic knowledge destruction being externalized.
Failed to distinguish between comparative advantage in stable conditions between aligned trading partners and strategic dependency in adversarial conditions between competing great powers.
Rewarded capital for extracting value from manufacturing communities through the Cantillon effect without charging anyone for the long-term consequences.
Layered legitimate worker protections into a compliance architecture whose cumulative cost falls entirely on domestic producers competing against manufacturers who carry none of it — and whose unintended consequences exclude the lowest-productivity workers from employment entirely.
Responded to the resulting dependency with tariffs that address the price symptom while leaving every structural cause untouched — and then labeled the market’s predictable routing response a scam.
The solution the Austrian framework points toward is not more tariffs and not fewer worker protections. It is the honest accounting of what the gameboard’s tilts actually cost — and the recognition that rebuilding what was lost requires patient capital, strategic investment in processing capacity, reconstruction of the tacit knowledge commons, and the intellectual honesty to examine why the industrial commons was dismantled in the first place.
That examination leads directly back to the financialization coup — the systematic routing of manufacturing’s productivity gains to capital rather than to the communities that generated them, the quarterly-earnings pressure that makes industrial investment structurally disadvantageous, and the Cantillon effect that enriched those closest to the capital flows while externalizing the costs onto the manufacturing communities furthest from them.
The US that was born into in the mid-20th century built things. The US that replaced it finances things, imposes tariffs on things built elsewhere, and publishes 25-page reports about why the tariffs are being evaded.
The gameboard was tilted over decades, by specific decisions, for specific beneficiaries. Naming the tilts is the beginning of leveling them.
The girl on the ladder can see the whole gameboard from up there.
The maze looks different from above.
Graham Summers, MBA — just kidding. This is the “To Boldly Go” Substack by the physicist from Prairie Village who has been reading between the lines for forty-four years. Add to it as you go along.
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