Telling the Truth on Tariffs

More firms will be hurt than helped by Trump's taxes on imported steel and aluminum.



It was frustrating and depressing to watch President Donald Trump recently announce misguided import taxes on steel and aluminum. Aside from the bad economics behind the decision, the saddest part of the pronouncement was to hear the president promise steel- and aluminum-workers standing behind him, "We're going to have a lot of great jobs … coming back into our country." I wouldn't count on it.

Tariffs are import taxes. Their immediate effect will be to jack up the prices of the metals in the United States. That sounds like good news to the 140,000 steelworkers and 28,000 aluminum-workers. But it's bad news for the more than 6 million people who work in the two metal-consuming industries. Their companies will now face higher costs, which could lead to layoffs and factories moving abroad.

This will also have a chilling effect on foreign companies planning to invest in the United States. Several of them have already announced that in response to the expected rise in the metals' prices, they will put their plans to expand production, build factories and hire workers here on hold. Swedish appliance-maker Electrolux, for instance, announced it is delaying a $250 million investment in America. DowDuPont, the world's largest chemical company, is considering other countries before it builds another $6 billion steel-intensive factory.

We are told that all of this is the price we must pay to discourage subsidized competition from foreign governments and increase demand, production and employment for our domestic steel and aluminum industries. But with history and economics as our guide, we shouldn't count on that actually happening.

In 2002, steel tariffs were put in place by the Bush administration. As expected, the price of steel went up. Not surprisingly, the additional cost reduced employment in the steel-consuming industries within a year. One estimate found that up to 200,000 jobs were lost. Meanwhile, employment in the steel industry was almost flat; only about 3,500 jobs were added.

Moreover, net steel jobs, which peaked in 1953, continued to decline. At that peak, the United States employed about 650,000 steelworkers. In the interim, steel production has remained fairly constant since the 1980s, after peaking in the 1970s. That should give pause to those who believe that steel tariffs will bring back jobs.

Though blaming foreign imports for this trend makes for an appealing sound bite, most experts understand that the biggest culprit is innovation. Whereas it used to take 10.1 man-hours to produce a ton of steel in 1980, you now need only 1.5 man-hours. Some mini-mills require only a half-man-hour for that output. That means that labor-intensive steel production isn't coming back. The fact that a few plants will reopen their doors in response to the imposition of tariffs won't change that.

What about the employment impact of boosting steel production to capture more than the current 70 percent share that domestic firms already have? Don't count on that, either. Steel producers would need really big capital investments to get new factories up and running to the point of significantly increasing production. And global investors aren't likely to change their behavior by parking their capital in U.S. steel, because they understand that government protection for industries clamoring for it won't lead to high and sustainable returns. They also understand that the extra U.S. steel production propped up by tariffs will most likely be too expensive to remain competitive.

Without significant capital infusion, steelmakers won't be able to produce the large volume they need to be profitable—and without sustained profits, steel jobs won't be sustained for long, either. This probably explains why the stock prices of the big steel companies didn't move much after the steel tariffs were announced. The same is true for aluminum. The United States imports 90 percent of that metal, and the investment required to increase its domestic production would make the price uncompetitive.

The bottom line is that no matter how you look at it, President Trump was misleading these steel- and aluminum-workers by telling them that jobs in their industries will come back. He wasn't the first politician to do so, and he won't be the last, but it didn't make it any less sad to watch.

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  1. “Telling the Truth on Tariffs”

    More irony from Reason. Reason simply can’t tell the truth about certain dogmas of faith, like open market and open border for America, and the effects they have on Americans.

    Obviously, tariffs are a tradeoff between different interests, as most foreign policy is.

    Buyers pay more. For corporations, this reduces their profitability. They pay less taxes. For consumers, it decreases their consumption.

    Sellers sell more. More people are employed. The sellers pay more taxes. The extra workers are now employed and paying more taxes instead of unemployed and consuming the taxes of other Americans.

    The tariff itself is a tax increase, decreasing the deficit, or allowing further tax cuts.

    I could go in more detail, but I hope the point is made. It’s a trade off with lots of costs, and lots of benefits.

    The big difference on the differential lump of steel is who got paid to work – a foreigner, or an American. And that the government gets a cut.

    1. “We are told that all of this is the price we must pay to discourage subsidized competition from foreign governments and increase demand, production and employment for our domestic steel and aluminum industries. But with history and economics as our guide, we shouldn’t count on that actually happening.”

      Much like in the immigration debate, the law of supply and demand gets immediately revoked when it runs counter to the open borders open markets dogma.

      It just doesn’t pass a laugh test.

      Obviously, if we raised the tariff a penny a pound. It affects little. If we raise it a thousand dollars a pound, we grind much of the steel industry to a halt. The truth, like the tariff, will be somewhere in between the two.

      And what the article *entirely* misses is that tariffs are a negotiation with our trading partners. In general, our tariffs are lower. If Reason had any sense, they’d see that getting lower tariffs with other countries is done by applying *leverage*. Isn’t that supposed to be a goal of Reason, to have lower tariffs *in other countries too*, and hence *freer* trade?

      1. But no, like NeverTrump dolts and “muh principles”, they never consider the iterative game aspects of any move, and how to get something from someone, you have to motivate them with an extra benefit or a cost. Since we’re currently giving them the benefit of lower trade barriers, our leverage would be to take that away, making what we give reciprocal to what we get.

        Tit for tat. That’s always a pretty good strategy. Taking the short end of the stick and liking it is the losing strategy. Time for the US to stop it.

        1. “Since we’re currently giving them the benefit of lower trade barriers, our leverage would be to take that away, making what we give reciprocal to what we get.”

          Take protectionism and trade barriers to their logical conclusion and you get North Korea. By protectionist logic, North Korea should be the wealthiest country on the planet, since their people are protected from almost all foreign competition.

          1. What part of the term “trade off” don’t you understand?

        2. “Giving them the benefit of lower trade barriers” sounds an awful lot like how I give Walmart the benefit of allowing them to sell me stuff for cheap. It pains me to see how many bags of stuff I have to lug out of the store when I could easily go down the street and get fewer goods for the same amount of money, but it’s a sacrifice I’m willing to make just for Walmart’s benefit.

          1. However it sounds to you, countries tend to consider access to the markets of other countries a benefit.

    2. “For consumers, it decreases their consumption.

      Sellers sell more.”

      Contradict yourself much?

      1. Read the stated context, smartass.

        “the effects they have on Americans”

        US buyers buy less in aggregate, but buy more from US sellers.

        Always sad when someone trying to play the smartass beclowns himself.

    3. “The big difference on the differential lump of steel is who got paid to work – a foreigner, or an American.”

      When a foreigner gets paid, the money is not lost. It eventually ends up back in here in the form of investments, like an Electrolux factory. Oh, wait. I guess not. Your taxes on the purchase foreign metal nixed that.

      1. Investments are not gifts.
        Investment = ownership = control.

        Do you want the country owned by China’s President for Life? I don’t.

  2. Raise the tariffs high enough and foreign producers are going to be hurt by having our market shut off from them. As long as they suffer, that’s all that matters. Cutting off your nose to spite your face gets a bad rap, but goddammit your face got spited, didn’t it? So who’s laughing now?

  3. I’d learn to live with these tariffs if they were accompanied by regulatory reform allowing new mines to open up in America.

    Environmentalism is a first-world, white person luxury. Right now, raw materials are being extracted in hazardous mines in countries with no environmental regulations, powered with coal that is far dirtier and inefficient than the dirtiest American coal plant. Then those materials are shipped across half the planet, spewing out millions of tons of more CO2.

    Tariffs are great for the environment. They force American companies to recycle steel or get steel from American sources, which will inevitably be far less environmentally damaging than in Asia or Africa. But this only works if our privileged environmentalists allow us to take advantage of our natural resources again, instead of forcing us to buy from third world country mines filled with basically slave labor, poisoning millions of people and destroying far more untouched and delicate ecosystems than we would in America.

    Since that will not happen, however, because Western environmentalists don’t actually care about solving any problems or being reasonable, these tariffs are stupid.

    1. Environmentalism is a first-world, white person luxury.

      Amen. Thanks to the EPA and OSHA and the DoL, among other regulatory schemes, we now have cleaner air and water, safer working environments, and more generous employment conditions, but the cost of that is that dirty, dangerous, low-paying labor-intensive jobs went overseas or got turned over to machines. We can debate whether the trade-off was good or bad, but insisting we can have good jobs at good pay, maintain our environment and be a low-cost producer of commodity goods all at the same time is insisting on a free lunch.

      1. My biggest pet peeve about Western environmentalists is their anti-nuclear idiocy. Everytime I hear somebody complain about how long nuclear waste’s half-life is, I ask what the half-life is of the toxic chemicals used to batteries and the chemicals extracted from Chinese mines where our solar panels are produced. The answer? There is none! Those chemicals largely exist forever. They have no half-life because some of them never decrease in toxicity.

        Idiots, all of them.

  4. And what’s with Trump’s concern over the trade deficit? What happened to the idea that if you owe China a billion dollars you have a problem but if you owe China 800 billion dollars China has a problem? We can just repudiate the debt any time we want – Trump said the very same thing during the campaign – and isn’t that how our Master of Debt President made his fortune?

    1. A trade deficit is not debt. There is no money owed.

      A trade deficit is when someone sells more stuff to you than you buy from them.

      For example I have a huge trade deficit with the grocery store. They never buy anything from me.

      I guess I’d be better off if I made stuff I buy from the grocery store more expensive. Slap a tariff on all their stuff. That’ll teach ’em!

      1. arg, sells more stuff to you than you sell to them

      2. Oh, so now you’re claiming to know more about debt and international trade than our very stable genius President who knows more about everything than everybody? Trade deficits are bad because it means Americans are consuming more than they’re producing and when you get more in trade than you give, this means you’re worse off. Or, wait, if you get more than you give it’s bad because if you have too much stuff then….Look, it’s bad! Okay? It just is! So shut up, you’re just trying to confuse me about this stuff.

        1. Money is wealth, and stuff is just stuff. They get our money and all we get is their stuff. We’re poorer because we have less money and more stuff, and they’re richer because they have more money and less stuff.

      3. A trade deficit is not debt. There is no money owed.

        Well that is simply nonsense. ALL money (except coinage which is now irrelevant) is now nothing but a claim on bank debt. And debt-based money means there is no such thing as a ‘closed’ transaction. Just a ‘perpetual’ debt claim that everyone is passing around from one person to another. You may THINK your petty transactions with the grocery store are closed – but that merely means that we are not currently in a liquidity/solvency/financial crisis.

  5. When we are saying ‘steel’ tariffs, does that mean we are putting tariffs on the constituent components that go into making steel?

    If so, then we are really talking iron, and as anyone who has studied the Iron Range in MN, it wasn’t foreign competition that wiped out most of the mining companies.

    1. Actually it was – but it happened a long long time ago. Iron ores from the US have been the lowest grade ores of any mines on Earth for about 60 years. Currently US ores are less than 20% FE while ores elsewhere are generally about 60% FE. So our ores require a lot more processing just to be able to feed into steel furnaces. That IS foreign competition and a perfect example of comparative advantage (which we don’t have now). The marginal integrated steel mill should generally always be built nearer the iron mine that can provide the ore so the transport $ is spent on shipping the higher-value product.

      Recycling mills are different because the US does produce a lot of steel garbage.

      1. It happened a long time ago, but I was around and knew a fair number of the workers on the Iron Range. The mines failed largely in order of how willing the unions were willing to negotiate with management in order to keep the mines operating in the face of increasing foreign competition. The last mine open was a mine that wasn’t union represented.

        I will admit this is all anecdotal and based on memories from my childhood, but it fits my prejudices and therefore I’m right.

        1. I don’t doubt the dynamics. But the reason US mine companies had to do that extra stuff (our ore had to be MORE labor-intensive than foreign ore) and thus get pushback from unions (re making labor cheaper) was because our ore grades dropped relative to the foreign competition. The ore grades themselves forced the industry into decline and nothing can be done about that. How the decline plays out – well its important to the players but none of them actually caused the decline no matter how much they want to blame each other.

  6. The same is true for aluminum. The United States imports 90 percent of that metal, and the investment required to increase its domestic production would make the price uncompetitive.

    No – the same is not true for aluminum. As recently as 2012, the US imported about 10-15%. That sort of rapid change from ‘imports near irrelevant’ to ‘complete dependence on imports’ – with a production drop of about 60% while demand has increased – means the production capacity still exists here. It is just running at about 30% of potential output. And the reasons why that change has happened so fast has very little to do with input costs either. North America still has plenty of competitive bauxite and alumina. Electricity costs have squeezed out aluminum smelters to a degree since those smelters are the marginal user but the main reason has been a)the strength of the dollar and b)artificially low interest rates that are subsidizing increased capacity in dollar-peg countries (ie China) and c)a Chinese coal subsidy for electric usage that is about to reverse.

    What is insane is that we continue to destroy ACTUAL capital investment in this country for the sole purpose of propping up Wall St and the financial sector and inflation in financia assets. Tariff is the wrong way to deal with this – but stop pretending the problem is everywhere EXCEPT Wall St.

    1. You got facts all over The Narrative!

  7. There’s too much steel and not enough demand on a global scale right now. So some foreign steel mills are selling at any price they can get wherever they can get it. Normally you’d expect plant closures and curtailments in this environment, but that hasn’t happened as quickly as you might anticipate as countries help prop up their steel industries. That’s the real problem; dumping is the symptom – Reuben Gregg Brewer article in Motley Fool

    But Reason only cares about U.S. protectionism. Reason only care about U.S. borders.

    The globalist must destroy the U.S. in order to impose their One World Government. And Reason does not care.

    1. They do care. They want it to happen.

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