Of Tariffs, Trade, and Turmoil

A recent announcement by President Trump that he would push for across-the-board tariffs on steel and aluminum set off a firestorm including threats of retaliation from a number of nations (including some of our oldest and closest allies), a significant drop in the stock market, and more dissension and division in Washington. There is good cause for alarm, because if they are enacted, such tariffs would dampen US economic performance and cause harm to a number of industries both in the United States and around the globe. The best case is bad; the worst case is awful.

While the tariffs might have temporary positive effects on steel and aluminum producers that are not efficient by global standards, any industry which uses those metals as inputs would face higher costs, reduced competitiveness, and job losses. A Policy Brief from the non-partisan group The Trade Partnership estimates that the proposed tariffs could cause the loss of five jobs for every one gained. Specifically, they estimate that the tariffs would increase iron and steel employment and non-ferrous metals (primarily aluminum) employment by 33,464 jobs but would cost 179,334 jobs throughout the rest of the economy. Add to that multiplier effects and fallout from potential retaliation from other nations, and the losses could quickly escalate.

So why the tariffs? The root of the problem is overcapacity in steel and aluminum production in China, which is causing that nation to sell the metals at prices below the cost of production. The steel and aluminum industries in the United States and elsewhere have been damaged because it is very difficult to compete with these low-priced products.

While there are valid reasons to deal with this issue, broad tariffs which affect all nations are simply not the way to do it because they wreak havoc on other industries and countries which have been playing by the rules. Furthermore, other nations can be expected to retaliate, which could escalate into a trade war, with various nations trying to put pressure on others by raising trade barriers on a wide variety of products.

In such a scenario, virtually everyone loses. Consumers would face higher prices, both for imported goods and for products made in the US which include imported inputs or raw materials. Businesses would have to try to stay competitive even with higher input prices and a disadvantage on world markets. Economic growth would be adversely affected, stock prices would almost certainly fall, and jobs would be lost. It would not be pretty, to say the least. We have already seen threats from Canada and the European Union to impose tariffs on blue jeans, bourbon, and big bikes (Harleys). That is only the beginning if broad tariffs are imposed.

Instead of the broad tariffs which have been proposed, a better approach by far would be to deal specifically with the situation in China, which exports only a very small percentage of the steel and aluminum used in the US. When issues such as unfair trade practices arise, those problems can be dealt with in a very targeted manner through various trade agreements and organizations that are in place. Unfair trade investigations are already underway related to the artificially underpriced aluminum and steel from China, and action can be taken as needed based on the outcomes.

Even the Aluminum Association is against the tariffs. The Association is an industry group whose members employ more than 700,000 people and include smelters and related facilities (which would probably see some modest and temporary gains from the tariffs) as well as other aspects of the industry.

Advocates for protectionist policies claim that free trade causes the United States to lose manufacturing jobs as some production moves to lower-wage locations overseas and lower-priced imports steal market share from US companies. It is true that some things that are made abroad were once made domestically, but the primary reasons are technological advances and wage differentials.

Technology has changed and will continue to change US manufacturing methods. Manufacturing output expands year after year but requires fewer workers as productivity rises and automation increases efficiency. Because of higher wages in the United States, certain products are difficult to produce at reasonable costs compared to other countries. However, unless we want to tolerate wages in line with the poorest countries on earth, we are not going to make the things that require the least skilled labor.

The key to dealing with these inevitable changes is to do what we do best in terms of manufacturing rather than to try to hold on to industries that are better suited to other countries. As jobs of one type disappear, workers can be retrained to enable them to find different jobs. Unfair trade practices must be dealt with, but a tariff which doesn’t discriminate between those nations which are breaking the rules and those which are not is going to cause far more harm than good.

Any action which interferes with free trade is a bad idea. The basic mathematics of trade benefits were described more than 200 years ago, and history has consistently and repeatedly proven those principles to be true. In the US, the Smoot-Hawley tariffs enacted in 1930 made the Great Depression longer and deeper than it would have been otherwise. High tariffs on steel after World War II allowed US producers to avoid adopting new basic oxygen furnace technology, thus losing global leadership in this sector. We have seen this movie before, and it does not end well.

Almost every country can produce certain things better, faster, or cheaper than others on a relative basis, and the rational response is to export some products and import others. In this way, everyone can be better off. By its very nature, trade can accelerate the demise or evolution of some industries, but overall, there is no doubt that international trade creates far more jobs than it destroys. These tariffs are a bad idea.