Tariffs: Trump’s Big Blunder by David Montgomery


The decision to impose tariffs on steel and aluminum imports is a very bad one. Protection of U.S. industries from unfair competition has always been part of President Trump’s message. It is what worried me most about him as a candidate, but until now his approach has been to eliminate ways that government is holding U.S. industry back. Changing course and erecting tariff walls like this could destroy all the good he has done with those positive economic policies.

The losers from tariffs include everyone who uses the products subject to the tariff, or products made from them. In the case of steel and aluminum, that is everyone. Protectionism only benefits the small number of owners and possibly workers in the industries being protected and hurts everyone else.

The case for free trade is very simple. Everyone gains if the United States specializes in those goods that it is better at producing, and trades them for what others are better at producing. Tariffs cause us to produce things that we are not so good at, so that we end up with less in total.

Tariffs do this by erasing the difference between the price at which we can buy steel and aluminum on the world market and the price that U.S. steel and aluminum companies need to receive to remain profitable.

Industries want tariffs because it costs more to produce steel and aluminum here than it does to import it. That is why tariffs are bad policy. Homely examples are in this case quite accurate: I could cut my own grass, but if I spend the same amount of time doing something that I am very good at, I can earn enough to pay my lawn service and have a good bit left over.

Protectionism also harms all the U.S. industries that use the goods being protected. As the picture below shows, steel is required in all the major U.S. industries, and the same is true of aluminum. They are necessary to make the machines that produce everything from automobiles to paper, they are incorporated in all major appliances, we could not generate electricity or build structures without them.

The entire purpose of these tariffs is to raise prices so that steel and aluminum companies can make a profit and replace imports with domestic production. Sounds like a great idea. But the higher price of steel drives up the price of everything else that consumers use: housing because of higher construction costs, automobiles because manufacturing equipment and materials cost more, energy as power plants and pipelines become more expensive, military budgets are stretched further because guns, vehicles, ships, airplanes and structures cost more.

There are a number of phony arguments for protectionism: somebody (usually China) is not competing fairly, it will put Americans back to work, it will fix the trade deficit, and national security is threatened.

They not competing fairly, so we have to retaliate. This is the most common and legally defensible argument for tariffs – some other countries are selling goods to us for less than their cost to produce the goods. The more accurate form of this argument is – they are being stupid so we have to imitate them. If China insists on selling steel or aluminum to us for less than it costs them to make it, why not just let them give us that gift? We can put the resources that would be required to produce the same amount of iron and steel to work in more productive ways – like making things out of iron and steel that we can sell for a profit without government tariffs or subsidies.

It will put Americans back to work. There are many ways in which President Trump’s policies are doing this – regulatory reform that lowers labor costs and increases productivity, tax reform that restores incentives for investment, and reform of Obamacare that removes a big tax that employers must pay to hire workers. But tariffs and protectionism do not. They may preserve jobs for specific workers in specific industries, but at the expense of jobs for workers in other industries that no longer have access to imports and find their costs increased to levels at which they cannot compete. One study, by the Consuming Industries Trade Action Coalition (CITAC), concluded that President Bush’s steel tariff cost 200,000 workers in steel-consuming industries their jobs in 2002 because of higher steel prices.

It will fix the trade deficit. The trade deficit cannot be changed by tariffs. Right now, we are borrowing immense sums from other countries so that the government can spend more money than it brings in. Just like a family that borrows in order to spend more than it earns, borrowing from overseas lets the United States purchase more from abroad than it earns by selling goods abroad. That is, borrowing equals the difference between imports and exports, and that difference is known as the trade (or current account) deficit. Tariffs may change what we import (and export) but as long as we are borrowing immense sums from overseas, the trade deficit cannot go down.

It is necessary for national security. No doubt, China is subsidizing exports and driving American companies out of the steel, aluminum and other industries. That does not amount to a national security threat, any more than Asian countries producing our televisions. By giving these subsidies, China is building an economy that can only sustain itself by constant increases in government-led investment, to produce goods to be sold on foreign markets at prices that fall further and further below their costs to produce. That is not a strong economy.

Our consumers are attaining a higher standard of living than would be possible if China were not making these gifts. The Chinese people are getting less and less for themselves as their government pushes greater subsidies into export industries. The Chinese government brings its day of political reckoning closer and closer by limiting domestic consumption in order to continue expanding its white elephant industries.

Even if China can sustain this kind of growth for a while, we have no need of an industrial policy to defend ourselves in modern wars. There is little likelihood we will face another World War II where victory went to the country that could produce the most and best armaments. If we do need to mobilize again, imports of steel and aluminum are available from many friendly countries, and the technology and mineral resources remain here. The national security argument is nothing but a smoke screen for the traditional pleas of the metals industries for protection from a global market.

This is not the first time that the steel industry has cried for relief. In 1969, 1978 and 1984 and 2002 protection was extended to the steel industry by Presidents of different parties. Sometimes the economy moves in directions good for US metals, and the demand for protection fades. Then things change, imports rise and the plea for protection returns. Most recently this happened with the end of the recession, with construction and investment taking off and steel and aluminum imports growing. That made U.S. steel producers look for a way to get a bigger share of the growing market, and getting some help for the government was the easy solution. They are in essence asking for the same subsidies the Chinese give, but paid for by consumers who, of course, are the ones who suffer in China too.

Protectionism is the Achilles heel of populism, where the right-minded desire of ordinary people to reclaim their culture and economic opportunities is unprotected from the arrows of economic nonsense. The drop in the stock market is the predictable and reliable indicator of the overall damage that these tariffs will inflict on the entire economy. Republicans in Congress have to remind President Trump that these tariffs will harm the very people who elected him, and take action to end them if necessary. That is good politics and looking out for the common good.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Letters to Editor

  1. The US produces 70% of its steel needs. We import 30%. Major sources are Canada. Brazil, South Korea, and Mexico. Then comes China at a lower level. All of our major sources of imported steel are friends – at least for now. Our neighbors are talking about wine, Harley’s, and farm production as a way to get back at us.
    Or, is this all about swinging a district in Western PA Republican in a special election soon.
    Give this a listen: https://www.brookings.edu/podcast-episode/why-trumps-new-steel-and-aluminum-tariffs-are-controversial/?utm_campaign=Global%20Economy%20and%20Development&utm_source=hs_email&utm_medium=email&utm_content=61121300

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