By Daniel Joseph
The blogger is a CCI senior with a passion for economics.
President Donald Trump shocked Congress, the markets and much of the world last week when he announced new tariffs on steel and aluminum imports. Specifically, he called for a 25 percent tariff on all steel imports and 10 percent on all aluminum imports. On Thursday, March 8, he made that announcement official by signing the order to institute the steep tariffs. To nobody’s great surprise, this move has triggered talks of a trade war. Now you may be thinking, “Good, China has gotten away with too much for too long, a trade war will show we’re serious about standing up for ourselves.” But the trade war threats aren’t coming from China. They are coming from our closest allies: Canada and Europe.
For anyone who skipped this lecture in Principles of Macroeconomics, here’s a quick refresher: A tariff is what is considered a barrier to trade. It is a tax placed on foreign goods entering a country. In this case it’s steel and aluminum. So, any steel and aluminum producer in another country who wants to sell their product in the U.S. will have to pay a percent tax to bring it to the U.S. This extra cost to sellers gets flipped into an equal percent increase in the price for buyers. Not only do foreign steel and aluminum become more expensive, but U.S. steel and aluminum producers are now able to raise prices and still be competitive. So overall, prices of steel and aluminum go up. A trade war is when a country responds to a tariff, with tariffs of their own. In a trade war, this cycle spirals, making trade between two countries very expensive on a wide range of goods and damaging global supply chains.
Tariffs, Beer and Harleys
I can actually feel your eyes glossing over and rolling into the back of your head. So, here’s why you should care: Even if you don’t buy much industrial steel or aluminum for everyday use, your favorite brands do, and these tariffs will make your favorite products more expensive. There’s $30 billion worth of steel imported to the U.S., so you can imagine what an increase cost of 25 percent will do. Things like cars, canned soup, and even beer will start costing more. This was not well received by the markets. The New York Stock exchange fell by nearly 500 points following the announcement, and businesses are pretty angry. Gary Cohn, the head of the President’s Council of Economic Advisors resigned over his opposition to these tariffs for this very reason.
Perhaps paying a little more at the dealership or grocery store is worth it to save all those steel jobs? I agree perhaps it is. Unfortunately, these tariffs aren’t saving jobs; they’re going to cost us jobs. According to an analysis by the Trade Partnership, a nonpartisan group, while a small amount of jobs may be saved in steel and aluminum plants, it’ll cost around 146,000 jobs in industries reliant on steel and aluminum inputs. The Steel industry employs around 200,000 workers in the U.S. By comparison, the industries that will suffer from higher steel prices employ millions of people.
As the U.S. economy is reeling from the economic harm caused by tariffs, the trade war will be starting. Canada has promised retaliation for any tariffs placed on them, and Europe has thrown around the idea of putting massive tariffs on classic U.S. goods like blue jeans and Harley Davidsons. Make no mistake, there is no such thing as “winning a trade war.” As the tit-for-tatting escalates, everyone ends up worse off as trade shrinks, and products become more expensive everywhere. And in case you forgot, the two sides here are long standing geopolitical allies. Global supply chains will be damaged, prices will rise and companies will lay off workers, and the post-world war II liberal world order will continue it’s steady retreat.
In the interest of national security, the administration has decided to enact “carve outs,” tariff exemptions, for Mexico, Canada, and other countries on a case-by-case basis. This is certainly welcome news for those reliant on cheaper aluminum, and could help prevent some of the more harmful extremes of a trade war. However, this is almost certainly going to be used as a bargaining chip in upcoming NAFTA renegotiations, so I wouldn’t bet on this issue going away anytime soon.
The repercussions for sudden and severe tariffs are destructive enough, and universally opposed enough, to warrant the President’s own party to come out against them. The GOP-controlled Congress is considering legislation to stop the tariffs before they happen. Republicans have been willing to bend their conservative agenda to populist leanings so far in this administration, but free-trade seems to be their breaking point. It’s hard to find any economists writing about how these tariffs will produce a net benefit.
Make no mistake; the loss of steel jobs has been devastating for families across the country. Anyone who has been to Youngstown recently has witnessed this devastation first hand. That is the root of this policy. President Trump promised to save steel jobs, and he believes this is the way to do it. The administration has cited national security concerns and the U.S. trade balance, but at the end of the day, this is a “gift” to the base. After all, President Trump’s base of white, working class, Midwesterners elected him to save their jobs and bring back the heyday of American manufacturing. Unfortunately, those days are gone and this is a gift they’re going to want to return.
The U.S. only imports 25 percent of its steel, which means we are still producing the vast majority of our own steel and aluminum. So why are we losing jobs? The sad, and difficult truth is we are losing jobs to the steady relentless progress of technology. Robots are replacing workers, and no tariff is going to reverse that. Using education and job training to create a more skilled workforce will.
Saving American manufacturing is a worthy cause, but the end doesn’t justify the means, especially when the means entails hundreds of thousands of jobs lost, higher prices and significant damage in relations with our closest allies, and the ends are isolated and insignificant. We don’t need to go down a path of mutual economic harm with our allies just to fulfill vague campaign promises.