4 Bad Arguments for Trump's New Tariffs
When it comes to trade, the president believes a lot of nonsense.
Last week, President Trump's announced sweeping tariffs on all steel and aluminum imports into the United States: 25 percent on American buyers of imported steel-mill products and 10 percent on American buyers of imported aluminum-mill products. Trump has favored strong tariffs for years, and some of his most prominent economic advisors are supplying him with arguments in service of his policy.
Those arguments are all wrong. Here are the facts about some of the favorite arguments made by protectionists. For the sake of simplification, I will mostly focus on the steel tariffs.
Argument 1: Trump's tariffs are necessary because our domestic industry has been decimated.
Last Thursday, the president said we needed tariffs because "they've destroyed the steel industry." The next morning, Trump tweeted, "We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON'T HAVE STEEL, YOU DON'T HAVE A COUNTRY!"
Steel is indeed an important metal. As David Burritt, one of steel moguls attending the White House meeting wrote in The Wall Street Journal a week ago, "Steel touches every American life in some way every day. Infrastructure, building construction, appliances, vehicles, energy pipelines and more require steel." As we will see later, that's an argument against tariffs, not for them.
But everything else the president said is nonsense. The choice isn't between producing 100 percent of our steel (and having a country) or producing no steel (and presumably losing our country). We also have the option to import steel with zero threat to our country.
The domestic steel industry is not vanishing—far from it. 70 percent of the steel bought for use in the United States is produced here in the USA. Also, American steel production hasn't changed much over the past decades. In fact, since 2010 it's actually increased.
Argument 2: We have to impose tariffs because foreign governments subsidize their industries.
That's rich coming from a country that imposes some 150 duties and tariffs on steel imports. It is also hypocritical from a country that claims to believe that cronyism is unethical and economically damaging. Precisely because cronyism truly is unhealthy and unfair, the appropriate response to cronyism abroad is not more cronyism at home.
When a country, any country, subsidizes its domestic industries, it actually hurts consumers in their own consumers as well as the non-subsidized companies. In short, there's no such thing as a free subsidy.
When a government imposes an import tax on foreign steel, for example, the main effect is an increase of the price of steel. The result is higher costs for all steel-consuming industries, as well as their customers. There are 140,000 workers in the steel-producing industry and at least 5.4 million workers, and perhaps as many as 12 million, in steel-consuming industries.
The consequence of higher steel prices is thousands of jobs lost in these latter industries in the name of protecting a few workers in the former—and, of course, higher prices and shoddier quality products for millions of consumers.
This is exactly what happened in 2002 when the Bush administration imposed some steel tariffs on a few countries' imports. Those taxes protected the steel industry from a few, specific competitors and allowed them to jack up the price of domestic steel, without a positive impact on steel employment.
Those in steel-consuming industries, however, weren't so lucky. By one estimate, 200,000 people lost their jobs in downstream industries in following years. That's more workers than in the entire steel industry.
According to a 2003 U.S. International Trade Commission report, other consequences of these 2002 tariffs were difficulties obtaining steel in the quality and quantity desired, a shift to using parts finished overseas, and the relocation of U.S steel-consuming facilities to other countries. These results sound like the opposite of what Mr. Trump wants to achieve.
Finally, when foreign governments subsidize their industries, U.S. consumers reap the benefits: they pay less for imports. The bottom line is that crony shenanigans abroad shouldn't be answered with crony shenanigans here, especially given that these will mostly hurt our economy. It is counterproductive.
Argument 3: We should impose tariffs for national security reasons.
Adding insult to injury, the Trump administration is invoking a rarely used "Section 232" of a 1962 U.S. trade regulation that allows for import restrictions in order to protect national security. That's total nonsense.
The U.S. military itself argues that it doesn't need the tariffs since 3 percent of our domestic steel production is enough to meet its needs. It even produced a memo saying this to the Department of Commerce. In addition, six of the 10 top importers of steel in this countries are our NATO allies.
Argument 4: We need tariffs to fight against China's overproduction of steel and Chinese subsidies.
Can we not bring China into this, please? First, 10 countries export more steel than China to the U.S. Also, as the Commerce Department's own report on steel shows, the decline of jobs in the steel industry started before competition with China. Industry experts know that this decline in jobs is due mostly to innovation and industry consolidation.
In addition, most people refuse to acknowledge that even if China were a capitalist role model and Chinese companies received no subsidies from their government, the competition from that highly populated, hard-working country would still be intense because of its sheer size.
Also, the concept of overproduction implies that we know what the optimal level of output is worldwide at all times. We don't. Overcapacity in one country also means lower-capacity in other countries and hence an opportunity of a mutually beneficial exchange.
The least distortionary way to address excess capacity if and when it does exist is to let prices fall. Tariffs, however, jack prices up. It's a bad idea that artificially prompts protected producers to add more capacity!
Governments, of course, notoriously prefer what's politically best to what's economically best. Given this reality, a better way to deal with allegations of subsidy-fueled excess capacity is to rely on the World Trade Organization and multilateral agreements.
Contrary to what the president claims, the U.S. is typically the one of the biggest beneficiaries of these agreements that result in other countries agreeing to lower their duties and tariffs to our level. And since the president is always boasting that he is a great dealmaker, it shouldn't be hard for him to get us a great deal once at the negotiation table.
President Trump and his supporters believe in a lot of bad ideas when it comes to trade—notions like "trade wars are great and easy to win" to "tariffs will reduce the trade deficit." Don't be fooled. It's all nonsense.