Tariffs and Supply Chain Distribution Article Questions Please read this article and answer the questions. Why is the author assuming that prices will inc

Tariffs and Supply Chain Distribution Article Questions Please read this article and answer the questions.

Why is the author assuming that prices will increase, and consumers will have fewer choices?
Do you agree with the author’s position? If so, why and if not why?

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Each question should be answered in a separate paragraph. That Noise You Hear Is the Sound of Globalization Going Into Reverse
As trade barriers break up world-wide supply chains, the real costs are
higher prices and fewer choices for consumers
Employees work on a section of a wing on the Airbus A350
wing production line at the Airbus assembly factory in
Broughton, U.K., in January 2017. The France-based
aerospace giant, which employs 14,000 people in Britain, has
said it is reconsidering its investments as the U.K. negotiates
an exit deal from the European Union. PHOTO: MATTHEW
LLOYD/BLOOMBERG NEWS
Greg Ip
June 27, 2018 8:03 a.m. ET
Around the world the gears of globalization are shifting into reverse.
Companies spent decades farming out every step of production according to where
inputs—labor, infrastructure, know-how—were optimally located. Now, as trade
barriers rise, they are grappling with how to localize production again.
Harley-Davidson Inc.’s plans to move some production out of the U.S. to avoid
European Union retaliatory duties is the tip of the iceberg.
German car manufacturers now export some models to the U.S. from Germany and
export others from the U.S. to China. That doesn’t make sense if the U.S. slaps tariffs
on German-made cars and China imposes tariffs on U.S.-made cars. Last week Airbus
SE warned its U.K. operations could be threatened once Britain leaves the European
Union because it relies on the bloc’s unified regulatory standards and free
movements of parts across borders. Bombardier Inc. said it would assemble some
aircraft in Alabama instead of Canada to escape U.S. duties.
As supply chains reorganize to serve
local markets, the numbers of jobs
gained and lost probably end up a wash.
The real costs are more subtle: higher
prices and fewer choices for consumers.
Pre-globalization, multinationals
routinely produced locally for local
markets, which avoided high tariffs but
meant small production runs and high
costs.
As trade barriers and transport costs
fell, cross-border supply chains took
shape. After the U.S. and Canada signed
the Auto Pact in 1965, their auto
industries became one. The North American Free Trade Agreement expanded
supply chains to Mexico. In 1996 the Information Technology Agreement
established global free trade in information technology products, spurring the
complex supplier chains that link designers and engineers in the U.S., Europe and
Japan with assembly and manufacturing throughout east Asia.
The benefits to consumers have been substantial, even if they don’t realize it.
Consider, for example, that most cars sold in protectionist Brazil must be assembled
there. As a result, a basic car sells for roughly 50% more than a comparable model in
globalized Mexico.
Assembling an iPhone entirely in the U.S. out of American-made components would
add up to $100 to its cost, according to a 2016 article in MIT Technology
Review. This assumes, of course, Apple successfully relocates its supply chain.
When, under pressure from the Obama administration, it began assembling
computers in Austin, Texas, it encountered numerous quality-control and workforce
headaches.
And while globalization is routinely portrayed as bad for U.S. workers, the truth is
more subtle. Routine, blue-collar jobs do get outsourced but high-end research,
marketing and design work gravitates to the U.S.
American multinationals account for 23% of U.S. private-sector employment, 53% of
exports and 79% of research and development, according to Dartmouth College
economist Matthew Slaughter. These companies pay one-third more than the
private-sector average.
The tax cut Congress passed and President Donald Trump signed last year was
meant to enhance those U.S. strengths. Lowering the corporate tax, eliminating the
taxation of foreign profits and imposing new penalties on profit-shifting incentivizes
“these high-paying firms to perform more of their operations in the U.S.,” the White
House Council of Economic Advisers wrote.
Rising trade barriers will counter those benefits.
The backlash against globalization long predates Mr. Trump, originating with
China’s entry into the World Trade Organization in 2001. Western companies used
China as a base from which to export to the rest of the world, but China didn’t
reciprocate: It used a cheap currency and a web of domestic barriers to discourage
imports. Following the global financial crisis, more countries imitated China with
inducements for local production.
General Electric Co. , before its recent crackup, sought to reshape itself for this
fractured world by localizing more production, such as investing $200 million in
making locomotives in India for the local market. Harley-Davidson already plans to
move some motorcycle production to Thailand to serve Asian markets because of
Asian tariffs.
Mr. Trump is merely seeking to copy what China, India and others have already
done: Force multinationals to produce in the U.S. more of what they sell here. But
imposing tariffs on existing supply chains is rife with unintended consequences.
Canadian steel uses iron ore from Minnesota, so Mr. Trump’s tariffs hurt both. About
17% of the value of Mexican-made cars exported to the U.S. originated in the U.S.,
according to Bruegel, a Brussels-based think tank.
Beckett Gas Inc., family-owned manufacturer of components for boilers, furnaces
and water heaters, has over the years shifted production from abroad to its
Cleveland-area factories. By continuously improving its production process, it has
avoided price increases and now sells all over the world.
But that arrangement has been endangered by the 25% tariff on imported steel, the
dominant input into Beckett’s products. “There are only foreign competitors to what
we do,” Morrison Carter, the company’s chief executive, says. Those competitors
now have a 25% cost advantage. Mr. Carter worries his customers, who already
have Mexican factories, will switch to Mexican-based suppliers. He is willing to bear
some short-term pain for a long-term leveling of the playing field. But, “We will
move production to country of sale whenever possible if the tariffs begin to look
permanent.”
Of course, supply chains that took years to take shape won’t change location
overnight. Businesses still hope the protectionist wave burns itself out, and the logic
of globalization reasserts itself. But a growing number are no doubt drawing up
backup plans that look a lot like Harley’s.
Write to Greg Ip at greg.ip@wsj.com
Questions
1. Why is the author assuming that prices will increase, and consumers will have fewer choices?
2. Do you agree with the author’s position? If so, why and if not why?

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