Trump is expected to announce steel and aluminum tariffs on 03/08 (today), against the advice of his chief economic advisor (who resigned as a result) and many Republicans in Congress including Paul Ryan, Speaker of the House.
Trump supporters, Steve Bannon, big steel and steelworkers might tout that we are finally striking back at China’s dumping of steel, but the implementation of these tariffs is so clumsy, so devoid of strategy, so ignorant of basic economic theory and practice, and so offensive to our allies who might otherwise be able to help our cause in this case, that the harm will surely outweigh the good. And this is true even if no retaliation against US products takes place, the absence of which is unlikely.
Here are facts about the tariffs and who might be helped by them and who might be hurt:
- The imported steel tariff is slated to be 25%. About one-third of the 100 million tons of steel used each year by American business is imported.
- The imported aluminum tariff is slated to be 10%, while imports account for more than 90% of the 5.5 million tons of aluminum consumed in the US.
- The latest reports are that Mexico and Canada might be exempt from these tariffs as they are deemed critical suppliers from a national security standpoint
- 140,000 workers are employed by the US steel industry, and 28,000 by the US aluminum industry, as compared to 17 million Americans work in industries that use domestic steel. Of these 6.9 million in manufacturing and 10.1 million in construction, according to the Bureau of Economic Analysis. Here are some examples of industries likely to be most impacted.
- The #1 export industry for the US (in which Boeing is included), the aerospace industry, accounts for about 2.5 million US jobs, and depends on both steel and aluminum imports. Remy Nathan, vice president of international affairs at the Aerospace Industries Association, told NPR that rising costs could create “a cascading effect that has fairly significant impacts on our industry’s global competiveness”. (Remember, this the US’s #1 export industry.)
- The auto industry will be especially impacted as they were entering a down cycle in the US. Increasing tariffs will hurt US production, and favor automakers abroad. Many foreign automakers with production facilities around the world, may incrementally favor their non-US facilities as a result of higher costs and reduced steel and aluminum supply in the US.American Automotive Policy Council President Matt Blunt issued the following statement on the U.S. Commerce Department’s 232 reports on steel and aluminum:“We are concerned with the unintended consequences the proposals would have, particularly that it will lead to higher prices for steel and aluminum here in the United States, compared to the price paid by our global competitors. This would place the U.S. automotive industry, which supports more than 7 million American jobs, at a competitive disadvantage.”
- 10.1 million workers in construction building bridges, buildings and other structures, could be impacted by higher prices, as already strapped state and local governments and private industry pull back on projects due to higher costs. Higher prices for US made beams and pipes for utilities will be likely. These actions go directly against the President’s goals of having the US re-build its infrastructure.
- The Trade Partnership, a non-partisan but pro-trade group, which does research on economic trade, estimates the number of jobs to be gained by the proposed Trump tariff at 33, 464 and the number of jobs to be lost at 179,334, a net loss of 145, 870 jobs.
- A rise in the price of steel hurts consumers as well through higher prices.
- Higher prices for autos are estimated to be in the $175 range. Some estimates, from Wilbur Ross who proposed the tariff to Trump, are as low as $35, but auto executives do not accept this estimate. Large appliances will also see a price increase.
- Even if price increases of individual goods is small the overall impact on consumer spending is large for families and in the aggregate.
- The expected increase in prices has been estimated to cost $300,000 a year for every job gained in steel and aluminum. The great deal maker is not making a great deal for the American people here.
- A case study of the impacts of a modern steel tariff imposed by the US is readily available. In 2002, the Bush administration imposed steel tariffs of 30% on sheets to a 15% tariff on bars and rods. At the time, the Christian Science Monitor and other publications predicted the tariffs would only raise domestic prices 0.2 to 0.4 percent, adding $2 to the cost of an auto. The actual result was that steel couldn’t be obtained at all by some producers one month after the tariff as small domestic businesses hoarded product, and within four months prices went up by 60%. US producers, who were only at 70% of capacity at the time, worked to supply domestic demand, but ultimately could not do so. By the end of 2004, steel prices were still up 60%. The results:
- According to one analysis, 200,000 jobs were lost to higher steel prices, representing $4 billion in foregone wages.
- Steel consuming firms were harmed as chaos reigned in the US domestic steel market.
The Bush steel tariff was widely considered to be a failure.
- Trump constantly touts the negative US trade balance as a the result of our bad trade deals. In fact, economists say that the steel tariff will negatively impact the US trade balance. US consumers will buy autos produced abroad when faced with higher domestic auto prices. In heavy manufacturing states like Wisconsin and Michigan, Trump’s tariff will create incentives for manufacturers to move across the border to Canada to avoid the tariffs.
- Trump cited Chinese dumping as the main reason for the tariff. The tariffs will not even impact China primarily, as Chinese imports account for less than 2% of American imported steel, but it could impact the top importers of steel into the US – Canada, Brazil, South Korea, and Russia. This is at cross-purposes with US foreign policy:
- We are trying to influence South Korea to support our efforts to de-nuclearize North Korea. If a conflict does break out between the US and North Korea, we need South Korea allied with the US. This tariff, along with the prior tariff on washing machines, is at cross purposes with our international policy goals.
- Russia will view this violation by the US of international trading rules as a pretext and opportunity to strike back at the global order the US has created.
- Country after country that has resorted to tariffs and high barriers to trade end up weakening not only the industries these tariffs protect, but often entire economies. Think Venezuela under Chavez and now Madero, and Argentina under the Peron era. While there may have been short-term gains from tariffs, in the long run these countries became uncompetitive internationally and living standards suffered dramatically. At best tariffs have short term benefits for the industries they are protecting, but in the long run they make them uncompetitive.
- There are more effective strategies to work through the issue of steel dumping in the US. For example, the Trump administration could have continued ongoing going talks with the Europeans about Chinese steel dumping and then taken it to the WTO as a joint grievance. Doing it this way, long term success at preventing Chinese dumping would be far more likely. If we need to use tariffs, tailor it to impact only the Chinese, not all countries.
- The announcement of the tariffs was clumsy, a surprise and off the cuff, catching Trump’s closest advisors by surprise. Gary Cohn resigned as a result; others were demoralized. The way this was announced maximized negative international reactions, and demeaned the US. Due to Trump, and his inability to follow protocol, trust is undermined and belief in the integrity of the US is sacrificed. Due to Trump, the US is approaching pariah status internationally.
Trump has cited national security as the justification for these tariffs. This is a rarely used argument, and the WTO has never seen it invoked to justify a tariff. But this argument is undercut the by need for industries like aerospace and the US Defense industry to obtain aluminum cheaply and without chaos in these markets.
Jennifer Hillman, a Georgetown law professor and former member of the WTO’s Appellate Body, said, “The U.S. says this is about national security. That exception has never been invoked since the World Trade Organization came into existence in 1995, This is uncharted waters.”
If this is truly about national security, then a more surgical way to avoid hurting key US industries making finished goods, far more sophisticated than steel, needs to be found, not this clumsy mechanism.
- We need to go back to basic economics to understand the reasons for US trade deficits:
As Daniel Griswald explains in an excellent Cato Institute (a conservative think tank)article, “The Misunderstood American Trade Deficit“:
“The necessary balance between the current account and the capital account implies a direct connection between the trade balance on the one hand and the savings and investment balance on the other. That relationship is captured in the simple formula:
Savings – Investment = Exports – Imports
Thus, a nation that saves more than it invests, such as Japan, will export its excess savings in the form of net foreign investment. In other words, it must run a capital account deficit.”
US trade imbalances are due to a lack of savings. The US can run these deficits because the dollar is the world’s reserve currency, ie. dollars are an asset other countries are willing to hold.
In additional, the lack of government savings, ie. the government deficit, is part of this equation. So by recently increasing the government deficit, Donald Trump and Congress just pushed our trade balance further negative.
If the US wants to reduce its deficit, then we need to save more, starting with the government.
- Retaliation from our allies (Europe) and trade competitors (China) is likely. For example, China, where the State exercises great power, can simply decide to not buy Boeing airplanes. It is in high technology where the US is most vulnerable, not in steel.
- This is one more abdication of leadership and tearing down of international trade organizations the US has architected, influenced and put in place, over the last 70 years. While US leadership has been under pressure for some time, Trump is damaging and actually abdicating our leadership in the international system. The resulting lack of influence and increasing disarray will not be good for the US.
- This brings me to my last point, WHY STEEL!!!! It is not strategic to US economic dominance as Trump indicates. The competitive advantage of the US is in high technology industries and innovation. To protect raw material production as Trump is doing, is the wrong focus. It is outdated, but worse it will not work. If new steel jobs are going to come to the US, it will be through innovation by US producers in steel. And tariffs will not encourage this innovation.
This irrational, clumsy policy, executed by Trump despite the cautionary advice of industry leaders, is one more nail Trump is putting into US global leadership, and is at cross-purposes with Trump’s stated desire to help American workers and the economy. It is far, far more likely to have a negative effort on the economy and workers. It contradicts other foreign policy goals such as having Europe assume a greater defense burden or de-nuclearizing North Korea.
But this time the American people and workers will see the adverse impact of this President’s policies, especially if trade wars occur. Maybe Trump’s base will finally wake up, and understand the damage this President is causing to them and more broadly to our standing in the World and to our democracy and institutions.