There are things to like about new President Donald Trump, especially his efforts to slash the size and reach of government which have so panicked the establishment. Less encouraging, though, is his fascination with tariffs as a tool of economic policy and international relations. His imposition, this week, of 25 per cent tariffs on imports of steel and aluminum doubles down on trade barriers implemented during his first term and is likely to cause similar damage.
In a Feb. 11 pronouncement, Trump declared his 2018 tariffs a success as “an effective means of reducing imports, encouraging investment and expansion of production by domestic steel producers, and mitigating the threatened impairment of U.S. national security.” That’s all the more reason, he claimed, to apply 25 percent tariffs to imports from previously exempt countries such as Canada.
A companion proclamation raised aluminum tariffs from 10 per cent to 25 per cent and extended them to imports from previously exempt countries for similar “national security” reasons. The tariffs are scheduled to go into effect March 12, to the applause of representatives of the steel and aluminum industries who won’t have to compete quite so hard as overseas competitors are put at a disadvantage.
Companies that rely on steel and aluminum to produce goods, and the customers of those companies, are in for a rough ride. Making that clear was Charles Johnson, president and CEO of the Aluminum Association, who on Tuesday praised higher tariffs for offering the industry an opportunity to invest in production because “today, there is not enough smelting capacity in the United States to supply the growing aluminum industry with the input materials it needs.”
If there’s not enough smelting capacity to substitute imported aluminum, that means Americans are bound to pay more for aluminum products. At the very least, that means rising prices and lost jobs. That’s exactly what happened last time around.
After the 2018 tariffs on steel and aluminum, economists Kadee Russ of the University of California, Davis, and Lydia Cox of Harvard University determined that about half of the 25 per cent tariff on steel passed through into U.S. domestic prices of steel. That put American manufacturers at a disadvantage relative to foreign competitors who paid lower global costs for the steel they used. That had some nasty downstream effects.
“We compute that this amounts to about 75,000 fewer jobs in manufacturing attributable to the March 2018 tariffs on steel and aluminum, not counting additional losses among U.S. exporters facing tariffs other countries levied in retaliation,” they concluded.
Alex Durante of the Tax Foundation pointed out last year that Trump wasn’t the first president to try to bolster domestic production by raising the price of imports. The Carter administration attempted the same thing with steel in the 1970s. Instead of being an opportunity for domestic producers to improve their own competitiveness, “these trade actions increased rent-seeking by less productive steel firms and reduced R&D spending and innovation.” President George W. Bush briefly implemented similar tariffs in 2002, only to see prices hiked for businesses that use steel. Resulting job losses ran as high as 197,000.
The Biden administration originally continued Trump’s tariffs on aluminum and steel before replacing them with still-intrusive quotas negotiated with some countries, noted Durante. Export growth fell by 0.11 per cent for each one per cent increase in steel and aluminum tariffs while they were in effect.
Bacl in 2018, Gary Clyde Hufbauer and Euijin Jung of the Peterson Institute for International Economics determined that the year’s round of steel and aluminum tariffs improved pre-tax earnings for steel firms by $2.4 billion. At the same time, they pushed up expenses for steel users by $5.6 billion.
“Yes, these actions create 8,700 jobs in the U.S. steel industry,” they wrote. “Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created. Wow!”
Worse, the Wall Street Journalreported earlier this month that domestic steel and aluminum producers started hiking prices in anticipation of the tariff announcement. Victims include American manufacturers such as Riverdale Mills, a Massachusetts-based fencing manufacturer that imports most of its steel wire since shipping costs are lower from Canadian plants than from distant American manufacturers in the South and Midwest. Even the prospect of trade barriers leads to higher costs for manufacturers and consumers.
Economic woes befall America’s trading partners, too, not that nationalists like Trump and his allies lose sleep over that point. While Trump directs his ire at China, U.S. neighbours Canada and Mexico consistently rank among top sources for steel imports. Canada is also a leading source of aluminum, with Mexico a lesser contributor, according to the U.S. Department of Commerce. China is ranked 10 as a source for steel in the U.S. and fifth for aluminum. Tariffs and inevitable retaliation will do enormous damage to the whole continent, at more expense to allies than adversaries. Relations with countries that should be economic partners can only suffer along with prosperity.
Writing last Sunday, economic historian Phil Magness of the Independent Institute explained that there is no upside to tariffs: “There are no good arguments for tariffs, just as there are no good arguments for price controls. They cause clear economic harm, they don’t achieve any of the things their supporters claim and they are especially susceptible to special interest capture.”
That’s a strong statement about a trade policy favoured by the new administration, but it’s one supported by the evidence. High tariffs have historically shielded domestic producers from the impetus to innovate and improve efficiency, and have raised domestic costs, killed jobs, reduced prosperity and damaged relations with trading partners.
Trump should stick to slashing the size of government and let American firms compete in the free market.
National Post