Free Trade

2018 Proved That Trade Wars Aren't 'Good and Easy to Win'

Regardless of the president's Twitter bravado, this year has provided a painful lesson in how tariffs grow government and hurt the economy.

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Less than 24 hours after his administration announced plans to slap new tariffs on imported steel and aluminum, President Donald Trump was already preparing to declare victory.

The declaration that trade wars are "good and easy to win" may be one of the enduring moments of the Trump presidency, since it seems to perfectly summarize much of the current administration's ethos. It's an obvious oversimplification of an incredibly complex policy that was launched impulsively and backed by little more than the president's hubris and naivete.

As 2018 comes to a close, it appears Trump continues to believe that higher tariffs are in the best interest of the United States. For those willing to look a little closer, however, the past nine months provide a sturdy lesson in the economic costs, policy failures, and political dysfunction triggered by his tariffs. Indeed, the consequences of Trump's trade war can be grouped into four categories—and none of them, at this moment, appear to be positive outcomes for Americans.

First, and most obviously, there are the higher costs created by tariffs, which are really just taxes imposed on imported goods when they enter the country. Americans have already paid $42 billion in higher taxes due to tariffs, according to an analysis by The Tax Foundation. That works out to a decrease of $146 in after-tax income for middle class Americans.

Businesses that rely on steel and aluminum imports (along with manufacturing components made in China, another target of Trump's tariffs) have felt the brunt of the impact. The taxes on imported steel, for example, get passed along the supply chain to increase the purchase price of everything from cars and homes to beer kegs and industrial widgets. Trump's claims that China would pay for these tariffs are proving to be as empty as his promise that Mexico would pay for the border wall.

Caro / Lueger/Newscom

Second, there are the knock-on economic effects of those tax increases. In the third quarter of the year (the first economic quarter during which the tariffs were fully deployed), more than one-third of the companies in the S&P 500 cited Trump's tariffs in earnings reports and calls with investors—including major American companies like Ford, Caterpillar, Harley-Davidson, and General Motors; the last of which recently announced massive layoffs that may have been caused, or worsened, by the sudden hike in supply costs. The Tax Foundation's analysis suggests that the tariffs will reduce the gross domestic product, a short-hand measure for the overall size of the economy, by about $30 billion while also depressing wages and costing more than 94,000 jobs.

More broadly, the tariffs may be contributing to the stock market's recent stumbles. The Dow Jones is down more than 1,000 points from where it was on March 1, when Trump announced the first round of tariffs, and down more than 1,500 points since June 1, when the steel and aluminum tariffs took affect.

Third, the tariffs have grown the size and power of the federal government. Trump has arguably abused his executive power in laying tariffs for supposedly "national security" reasons, despite his own admission (and that of his soon-to-be-former defense secretary) that they are not necessary for national security. But the bigger abuses of power have occurred within the administrative state, where Commerce Department bureaucrats have been empowered to hand out tariff exemptions for some businesses. Getting an exemption can be a lifeline for a company, but the process is murky, slow, and fraught with politics. American steelmakers have been accused of exerting influence over the exemptions, and there's no due process for businesses to appeal denials.

In short, the Commerce Department's implementation of Trump's tariff policy amounts to a huge expansion of government power over the independence of American businesses and the livelihoods of their employees. It's a far cry from the "open and transparent process" promised by Commerce Secretary Wilbur Ross when he announced the tariff exemption process in March.

Finally, the trade war has put American taxpayers on the hook for direct bailouts to American farmers harmed by the trade war. This is perhaps the ultimate example of how Trump's tariffs have turned into an own goal. Using a New Deal era crop insurance program, Trump has funneled more than $9 billion to farmers who have been unable to sell their goods to China due to retaliatory tariffs raised in response to Trump's tariffs. Soybean farmers have been particularly hard hit—the U.S. is the top global supplier of soybeans, but China has all but stopped buying American soybeans—but suppliers of cotton, dairy, and hogs have also received payments.

Trump has tried to frame these payments as him "making good on my promise to defend our farmers." But those farmers would be better off if they were able to sell their goods—like they used to do—rather than being bailed out by the same federal government that's also driving up their equipment and supply costs.

It's also worth considering what hasn't happened since the tariffs were imposed. Despite Trump's repeated assertions (which have now earned him a "bottomless Pinocchio" from The Washington Post's fact-checkers), there are not seven or eight new steel plants being built across the country. There's not even one—unless you count U.S. Steel making some upgrades to its main facility in Gary, Indiana.

Meanwhile, steel stocks have taken it on the chin since the tariffs were imposed—U.S. Steel's stock price has collapsed by more than 50 percent since early March. Aluminum manufacturers have added a mere 300 jobs since the protectionist tariffs were imposed, but American aluminum-consuming companies have paid more than $690 million in import taxes. Do the math on that one.

One major aluminum manufacturer, Alcoa, has actually sought an exemption from the tariffs that were meant to be protecting it from competition. It turns out that businesses that make aluminum also have to buy things made of aluminum—and those purchases are now more expensive.

There's also been no major breakthrough on trade with China. The rewrite of the North American Free Trade Agreement, which Trump has claimed as a major victory for his zero-sum view of the world, is far from a sure bet to make it through Congress. And the tariffs have heightened tensions between America and many of its key allies and trading partners, including Canada and Europe.

In the end, America may very well "win" the trade war—or, more likely, it may "lose" less badly than other countries. Still, it's plain to see that it hasn't been good, and it won't be easy to recover.