07/09/2025
The Law of Unintended Consequences
Side effects are familiar enough in medicine -- you don't want to take a drug for one serious ailment if the consequence is simply to cause another serious ailment. And in the world of economics, too, there are side effects that can completely negate the intended benefits of a policy. We call these, simply, "unintended consequences."
High tariffs in the modern world are nearly extinct, for a variety of reasons. One principal reason is that tariffs are so frequently fraught with unintended consequences that they tend to be somewhat self-defeating. The great economist Milton Friedman regarded tariffs as so deleterious to one's economy that one should not even participate in a trade war -- because the harms to one's own economy from tariffs are almost always greater than any benefit. Let other countries harm their economies with tariffs, Friedman said; don't make the mistake of harming your own.
The other day, it was suggested that the United States may impose a 50% tariff on imported copper. The price of copper spiked, and stocks of domestic copper mining companies likewise. This certainly caught our attention, because the universal favorite conductor of communications cabling is copper. It's highly conductive, and, when properly annealed, highly flexible. Substitutes like aluminum and silver have significant drawbacks, so copper dominates the communications cable business. A little bit of tin and silver are used in plating on some products, aluminum shows up in foil shields and on the cheap braids on lower-quality coaxes, and silver conductors appear in a handful of specialty products, but copper is far and away the best and, consequently, most common material in communications cable.
The price of copper is enormously consequential for a business like ours, and for our customers. Copper is such a large factor in cable manufacturing cost that many wholesale price quotes in the industry aren't simply "X per 1,000 feet," but "X per 1,000 feet plus an adjustment factor based on the spot price of copper." Some products, such as speaker wire, contain so much copper relative to plastics or to other manufacturing costs that the end product pricing pretty much scales right along with the price of copper itself. So naturally anything which influences the price of copper is of significant concern to producers and consumers in this industry.
But, the protectionist argument has always gone: the benefits to domestic industry will outweigh the enormous cost to the consumer. And it might be that in a pure domestic resource extraction industry like copper mining, the benefits to the owners of mines are indeed huge. Whether those outweigh the enormous cost to the consumer is a political question loaded down with a lot of related questions about values (does the government have any business at all telling you who you can buy copper from, and on what terms? Those not averse to big government may say yes, but those more averse will say no.).
But set aside the pleasant scene of delighted mine owners, which surely brings a smile to the face of anyone whose loved ones own copper mines, for a moment. The mining industry isn't the only industry affected. Anyone who consumes copper -- the plumbing industry or the communications cabling industry, for example -- is also affected. And here's where the law of unintended consequences, refracted through the lens of the actual laws governing import and export, comes in.
When one imposes a tariff on a metal, that tariff applies to specific articles which are composed of, or principally of, that metal, and which are classified as such. There is an international classification system for goods, the Harmonized Tariff Schedule, and HTS Chapter 74 governs articles made of copper. Anything which falls under Chapter 74 would be swept in under a general 50% tariff on imported copper.
But there are a lot of articles with substantial copper content which are NOT classified under Chapter 74, and here's where the consequences get interesting. All types of communications cabling, of whatever metals they may be composed, are classified under Chapter 85. Under Chapter 85 there's no distinction made between articles made of copper and those made of other metals (or of no metal at all). And, of course, even if there were, it would be impractical to impose a 50% tariff on the copper content of those articles; Chapter 74 articles are always things composed principally of copper and copper alloys, but Chapter 85 articles which contain copper may contain anything from a negligible amount (e.g., coaxial cable with copper-coated steel conductors like most CATV drop cable) to a substantial amount (e.g., electrical contacts made of copper or brass). So Chapter 85 articles will miss the 50% tariff, while Chapter 74 articles will be subject to it.
Now, let's imagine that you are a large international firm with manufacturing facilities in many countries. Belden, for example, manufactures some cable in Mexico as well as in the USA. The Richmond, Indiana plant's wire-draw operations start with bulk copper rod -- a Chapter 74 article which will become much more expensive (both from domestic and foreign suppliers) with a 50% tariff. But when Belden draws the wire, strands it, extrudes dielectrics over it, combines conductors and extrudes a jacket over the whole thing, the product is a Chapter 85 article. Now, consider:
If you're a company like that, and you are wondering whether to import copper into the USA for cable manufacture or whether to send that copper to one of your non-US facilities for use, a 50% tariff on copper imports gives you an absolutely massive incentive to send those manufacturing jobs outside of the USA. Why? Well, if you import raw copper to your US cable factory, you pay a 50% tariff. If instead you take that copper to Mexico, no 50% tariff; and when the Mexican plant is done with the product, it's no longer a Chapter 74 article, but has been transformed into a Chapter 85 article, subject to much lower tariffs when it finally enters the USA. Anyone faced with that choice will readily see that the only sensible policy, under the tariff, is to move as much manufacturing as one can outside of the USA.
And, of course, this applies between companies as well. If you are a purely domestic producer of cable, you face huge increases in material costs which your foreign competitors do not face. And when those foreign goods come into the country, they are no longer Chapter 74 goods, but Chapter 85 goods, subject again to the lower applicable tariff rates. A 50% tariff on copper imports gives a massive -- perhaps entirely overwhelming -- competitive advantage to foreign producers of communications cable.
It may be that a fellow who owns a copper mine is absolutely delighted to have his foreign competitors put at a severe disadvantage by huge copper tariffs. But his delight will be offset, in the big picture, by substantial losses of jobs in domestic industries that transform bulk copper into goods no longer classified under Chapter 74.
Not everything, perhaps, is ideal about free markets; that's a political question which has been raging for a long time. But one of the things which free markets do avoid is the law of unintended consequences. The voluntary transactions between free people, unburdened by big government restrictions, produce a sensible market for goods and services where arbitrary distinctions like that between Chapter 74 and Chapter 85 goods simply have no impact at all. When we try to impose huge tax increases for the purpose of benefitting one group of people, we tend to inflict great injury upon other groups of people.
As with all such questions, the issue of whether that's good or not depends upon one's values. But whatever one's values, it's important to go in with eyes open. A 50% tariff will not just harm people like us and our customers, but will also hurt America's domestic bulk cable manufacturers and their many employees, handing a substantial unearned advantage to their foreign competitors. If there is an objective to be reached by this path, all we can say is that it had better be a very, very good one.
We are, of course, watching what happens next in copper. We always do, but never in our history has the potential for such a disruptive increase in copper prices presented itself. Obviously, if it comes the impact upon pricing will be immense, and the advantage handed to our foreign competitors will be similarly immense.