Why Some American Businesses Want More Tariffs
A quick lesson about concentrated benefits and diffused costs
Many American businesses are understandably unsettled by the higher costs and general uncertainty that President Donald Trump's tariffs and tariff threats have injected into the economy.
Some, however, are cheering for more—because they stand to reap the benefits of higher prices, while those costs will fall on everyone else.
In a letter to the White House on Monday, several organizations representing U.S. steelmakers called on Trump to hike tariffs on steel and eliminate the government's exemption process that allows some imported steel to enter the country without being subject to those higher taxes. Increased steel imports, the organizations argued, are "once again threatening the viability of domestic steel producers and U.S. national security."
The steel industry got its wish, in a way, on Tuesday morning, when Trump suddenly announced huge new tariffs on steel imports from Canada—thus escalating a North American trade war that seems to change by the day.
Even before those tariffs, prices on the domestic market were rising as American manufacturers anticipated new tariffs coming down the pike. Reuters reported last month that steel prices in the U.S. had climbed 20 percent since Trump took office, compared with a 6 percent hike on prices in Europe.
Of course, it should be no surprise that American steelmakers would welcome (and lobby for) more protectionism like this. A tariff artificially inflates the cost of imported steel, which means domestic steel manufacturers face less competition from abroad and can charge higher prices.
When Trump slapped 25 percent tariffs on steel and 10 percent tariffs on aluminum in 2018, for example, prices of both metals increased immediately afterward. Domestic manufacturing output of both steel and aluminum increased a bit as well.
The tradeoffs for those modest gains, however, were severe.
A 2018 study by the Peterson Institute for International Economics found that Trump's steel tariffs cost $650,000 per job created, with those higher costs falling on downstream businesses that had to buy steel at higher prices. Similarly, a 2019 Federal Reserve study found that those higher prices caused downstream manufacturing job losses that overwhelmed the modest employment gains in the steel and aluminum industry.
Not only did the tariffs impose those immense economic costs, they also failed to achieve their primary policy goals. Forcing American manufacturers to pay higher prices for steel did not reduce China's output to the global market and did not resurrect the American steelmaking industry. Indeed, American steelmakers did not take advantage of the higher prices to invest in production or hire more workers, but mostly just fattened their bottom lines.
It's no wonder that they'd like to do that again. The steel industry's request for more tariffs is pure self-interest. However, the job of policymakers is to weigh all the costs and benefits of an idea before deciding whether to go ahead with it.
The first Trump administration's experiment with higher tariffs seemingly confirmed what economists already knew: The concentrated benefits created by tariffs are not worth the larger, but more diffused, costs of those policies. Trump is seemingly incapable of making such calculations—or at least unwilling to do so.
