Economics

Actually, Tariffs Do Matter

|


In a recent tweet, President Donald Trump described tariffs like the ones he has imposed on America's biggest trading partners as "the greatest!" Rather than correct his boss' delusion, Commerce Secretary Wilbur Ross suggested import taxes on steel and aluminum could in fact be the elusive free lunch we've been waiting for.

In written testimony for the Senate Finance Committee, Ross said a 25 percent tariff on steel imports would lead to the reopening of closed mills, the maintenance of a skilled workforce, new investment in needed R&D, and a potential increase in total production, all of which would allow the domestic steel industry to "achieve long-term viability." While doing the cable news rounds, he added that this miracle would be achieved at a cost of only a few cents per item and would have "a negligible effect" on the economy.

Republican and Democratic senators didn't buy this fantasy, and neither should you. Even if it were the government's role to artificially inflate one sector's profitability, the American steel industry doesn't need the help. It already produces 70 percent of the steel consumed in the U.S., and its executives are richly compensated for it.

Domestic steel output is also near an all-time high, despite a large reduction in the sector's workforce since its peak in 1956. As the Commerce Department's own January 2018 report shows, that decline in jobs predates the competition from China and is mostly the result of innovation and industry consolidation.

Ross isn't the only person to claim that imposing tariffs on a wide array of goods won't cause America to suffer that much. Some argue that a 25 percent import tax on $34 billion worth of Chinese goods is a drop in the bucket compared to our $20 trillion economy. But that's a bogus justification—international trade is less than 20 percent of U.S. gross domestic product, and trade with China amounts to just 3 percent. So yes, the economy-wide effects of import taxes are both undeniably negative and undeniably small when measured against our giant economy as a whole.

What's not insignificant is the negative economic effect on industries that rely on the product being taxed. In 2002, the U.S. imposed similar tariffs in the name of protecting America's 190,000 steel employees. All it did was allow domestic producers to jack up the price of American steel. Meanwhile, 200,000 people lost their jobs in downstream sectors, with no employment increase in the steel industry. In other words, more Americans found themselves out of work than were employed in the entire American steel industry at the time. The impact of the tariffs on the nationwide economy looked negligible, but the deep harm to steel-consuming sectors prompted the Bush administration to suspend the policy four years ahead of schedule.

The same chain reaction is happening today. According to the Commerce Department, 14,000 jobs will be gained due to the metal tariffs—and roughly 16,000 jobs will be lost in the construction sector alone. Add losses from some 20 other downstream industries, and you get an idea of the devastation. From a garbage disposal company in Wisconsin to several tire-cord manufacturers in Alaska, thousands of small and medium-size domestic businesses employing hundreds of thousands of workers are now weighed down by higher production costs that jeopardize their profitability and their employees' livelihoods. Even when they can shift some of the burden to consumers, these companies become instantly less competitive globally.

The flood of U.S. companies appealing to the Commerce Department for exemptions from the Trump tariffs reveals how widespread the impact is. That agency has received more than 19,000 applications so far from businesses asking Uncle Sam to stop hurting them via import taxes.

One such applicant is the Missouri-based Mid-Continent Nail Corporation, which has already laid off 12 percent of its work force due to higher costs. It now says it might be forced to move its plant to Mexico in order to remain competitive—if it manages to stay open at all.

Most government policies don't have immediate and noticeable effects on an economy as large as ours. But even if Trump's tariffs lead to only a tiny downturn in GDP numbers, I'll bet it won't feel negligible to the Americans who will lose their jobs in the name of government favoritism.