It's Hard to Tariff a Pencil

And other thoughts on trade proposals

Photo by ROCCO STOPPOLONI on Unsplash

In 1958, Leonard Read published a short essay entitled, "I, Pencil," in which he posited that no individual person in the world is capable of making a No. 2 pencil on their own.

A pencil is made from trees from California, graphite from Sri Lanka, wax from Mexico, oil from Indonesia, and from the labor of countless geographically dispersed individuals, Read observed. From the loggers who cut down the trees to the truckers who transport the materials to the factory, to the machinists who carve the wood into the familiar pencil shape—and that is to say nothing of the many different materials that go into the lead, finishing, metal clasp, and eraser—thousands of people have a hand in the production of a single pencil. In fact, Read argued that millions of people contribute if you include those who built the roads the truckers used, designed the machinery used in the factories, or even who grew the coffee beans that wake the loggers up in the morning.

Beyond being a fun intellectual exercise that demonstrates how much more complicated producing a simple item like a pencil is than it may seem, Read's key theme in "I, Pencil" is a capitalist one: the millions of individual acts that go into pencil production are best guided by the invisible hand of the economy rather than centralized coordination. He wrote (speaking from the perspective of a pencil):

"Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks...nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade...Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants.

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature, an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configuring naturally and spontaneously in response to human necessity."

What of Today?

If the global supply chains that produced No. 2 pencils in 1958 were complex, they are even more so today. Take a much more intricate item like a car, for example. A Toyota Corolla or a Ford F-150 is not simply "Made in Japan" or "Made in America." Each contains thousands of individual components produced around the world. While they might be assembled in a centralized plant capable of generating hundreds of fully built vehicles a day, the origins of those parts span the globe, with thousands, if not millions, of hands involved.

Consider one notable example that has been in the news of late: auto plants in Detroit, Michigan, and Windsor, Ontario—cities located across a river from each other. A single component in a Chrysler or Ford vehicle might cross this border between Michigan and Canada six times before it finally ends up in its finalized version in a car or truck. Each crossing could involve a new step in the process: cutting the metal, shaping it, inserting it into a larger component, connecting it to a power source, and so on.

How would one apply a tariff to such a complicated process of production? It remains to be seen.

An Honest Look at Tariffs

The argument for tariffs is thus: placing a tax on foreign goods coming into the United States allows American companies to be more competitive domestically. This can help preserve American jobs by discouraging businesses from moving operations to lower-cost countries, where labor is cheaper, and regulations (including environmental ones) are less stringent. Tariffs can also be used as leverage in unrelated policy negotiations, as Trump has proposed in efforts to pressure Mexico, China, and others regarding the fentanyl trade.

Another argument for tariffs is fairness. American companies must comply with labor and environmental regulations (most of which are well-intended and commonly agreed upon as necessary to protect the well-being of workers and our natural world, etc.). On the other hand, many international competitors producing the same products may not be held to the same standards. This is one reason so much manufacturing has shifted to Southeast Asia, where labor costs are often 80-90% lower than in the U.S. The economic transformation following trade agreements like NAFTA wiped out many industrial centers and rural economies in the 1990s and 2000s. As Bruce Springsteen sang: "They’re closing down the textile mill across from the railroad tracks. These jobs are going, boys, and they ain’t coming back." Would tariffs have preserved some of those jobs and the communities in which they were located? Hard to say, but the question is a fair one to ask.

For all the political debate over Trump's tariffs, it's important to note that other presidents, including both Biden and Obama, have used tariffs strategically. Biden maintained many of the tariffs Trump established during his first term. President Obama enacted a 35% tariff on Chinese tires in 2009 and later imposed tariffs on Chinese solar panels and steel. The world did not end.

However, what is different today with Trump is the sheer breadth and unpredictability of his tariff proposals. His approach appears to be largely improvisational. Whether this is a deliberate tactic to unnerve trade negotiators or simply erratic policymaking remains an open question. But for businesses, both in the U.S. and abroad, the uncertainty is just as challenging as the economic impact from the tariffs themselves.

It’s Not That Simple

A key challenge: even if tariffs succeed in compelling companies to relocate operations to the U.S., it could take years for those transitions to occur. Name any single component of a vehicle—how long would it take to set up production mechanisms for that one part? Months? Years? And how expensive would it be? For some companies, the cost could run into the hundreds of millions of dollars, an expense that would ultimately be passed along to consumers.

A recent episode of The Wall Street Journal's podcast "The Journal" interviewed Steve Greenspan, CEO of a company producing common kitchen and household storage products, much of which is manufactured in China and Southeast Asia. Greenspan noted in the interview that:

Making these types of products within the US, the infrastructure doesn't exist and we don't have competitive labor to be able to do these things. We're talking about, in our case, a drying rack that might retail for under $19.99. So it's not even a conversation for our types of products to be made in the United States.

He also pointed out that moving production is extraordinarily expensive:

Once the initial tariffs hit China in 2018, and even before that when there was the talk about it, we and our subcontractors, our longtime partners in China, started having discussions and made plans to very quickly move outside of China.

This is tens of millions of dollars worth of investment. We're starting with literally a pasture. Then building it up from there. You have to train employees that have never made this type of product before. You have to build up your entire infrastructure for raw materials as well as the cardboard boxes that the products go into. You have to build your transportation network, you have to build your shipping network because now you're going out of new ports in a new country. And this is a very, very disruptive thing.

Yet, Trump could wake up tomorrow and decide Vietnam is next on the tariff list, rendering all that investment pointless.

In an Ideal World

Should companies be able to manufacture products using workers paid 80-90% less in factories with minimal labor protections while ignoring environmental regulations? Of course not. However, the reality is that consumers demand low prices. I’m purely speculating on the cost of the same drying rack Greenspan mentioned above it was made entirely within the United States —$60? Would Americans pay $60 for plastic drying rack? It’s hard to imagine.

The ideal solution is not eliminating free trade but ensuring it is both open and fair. While Trump views tariffs primarily through economic and political lense—focusing on trade deficits and other cross-border issues like the drug trade—there is also a labor and environmental argument for more free-flowing, yet ethical, global trade.

The challenge is that we lack an effective system of international law to enforce fair labor and environmental standards. Organizations like the United Nations and the International Court of Justice exist, but they have limited enforcement power. Countries comply with international rules only when it suits them, and for various reasons of self-interest but also cultural and political differences, there are not worldwide agreed upon economic standards and practices.

The United States, and the world, are likely generations away from developing an international governance structure capable of enforcing such standards. And for now, the trend toward global cooperation appears to be reversing rather than advancing. So that means countries are becoming more isolated economically than less.

What the Future Holds

My own gut reaction to the Trump tariffs is that many of them will be softened in the weeks and months of negotiations ahead. Trump will claim victory for enacting them, and there will certainly be some impacts, but the ones that are put and kept in place will not be as stringent as what has been discussed publicly so far.

One reason for this is that the markets themselves do not like tariffs. Look at how the stock market has done over the past week or two, as the reality of these tariffs has started to settle in: the S&P 500 is down 5% in the last month, and the tech-heavy NASDAQ is down closer to 8%. Trump is, in fact, a watcher of the markets (and the cable news shows that cover them), and their volatility (especially in the downward direction) may give even him pause.

If the tariffs do remain broadly and deeply implemented, we are in for several years of volatility, and not just in the stock market. As mentioned above, it will take months and years for production of various goods and services to move back to the United States. It could be arguably stated that this, in the long run, would be a good thing for American jobs and communities. But this process would also come with higher prices on drying racks (and cars, and pencils, and practically anything else you could name), and a lot of turmoil in between.

Ultimately, Americans generally want the best of both worlds on all manner of issues. We want low taxes and balanced budgets. We want a clean planet and fewer regulations. And we want goods and services to be produced here in the United States by companies that employ our fellow Americans, but we don’t want to pay more than $19.99 for a plastic drying rack. At a certain point, however, it’s not just an academic question or political debate, but an economic reality that these interests are eventually incompatible without much deeper and longer term conversations (and political agreement) about global trade, ethical business standards, and the pricing of the goods and services we Americans so do love.

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Appendix

• You can read “I, Pencil” by Lawrence Reed here.

• Listen to the Wall Street Journal podcast episode (or read the transcript) about tariffs that is referenced in today’s article here.

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Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.