Trump's Tariffs Are All about Politics

I've noticed recently an interesting dichotomy of general presumptions being made by President Trump's most fervent supporters.  It goes like this.  If you're for Trump's protective trade policy demanding tariffs on imported steel and aluminum, you're a patriot who's looking to protect American workers' jobs.  If you're against that policy, you're a globalist cuck who doesn't care about American workers.

It's an incredibly unjust framing of the argument, because there are myriad legitimate doubts about the efficacy of Trump's protectionist trade policy.  Inexhaustible amounts of evidence exist to suggest that such policies do little to spur economic growth, at best, and at worst, they are economically destructive.

First of all, the steel industry is thriving and has been growing in America.  We are the fourth largest steel-producing nation in the world, and the steel industry has seen substantial growth in recent years.  It simply happens to be doing that with fewer workers. 

That's not the result of our nation being the victim of some predatory trade policy of foreign nations.  It's the result of innovation and global competition, two inescapable realities in any free marketplace, neither of which is a bad thing.

But Trump continually touts that steel imports have created an "unfair" balance of trade, leading us to have deep trade deficits with certain countries.

Let's pretend that the opposite of the dreaded trade deficit, a trade surplus, is some kind of economic Nirvana that we are desperate to achieve, as the argument seems to be. 

We've experienced that several times in the past.  Here's an example of a time when we had a pretty large, sustained trade surplus: every single year of the Great Depression.

Any guesses as to how we achieved that?

There are several reasons for the Great Depression, but you'd be hard pressed to find economists who don't give a lot of the credit for those awesome trade surpluses to the Smoot-Hawley tariff.

There is an open question as to whether the Smoot-Hawley tariff factored heavily into the stock market crash of 1929, but there is no question that the tariff attributed to the depth of the Great Depression and the severity of the trade war which followed.  As Burton Folsom, Jr. describes in New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America,* Smoot-Hawley "instituted the highest trade tariff in American history" and was a major contributor leading to the Depression:

Foreigners were understandably outraged.  In Switzerland, for example, the leading industry was watch (and clock) making, and the leading customer for these timepieces was the United States.  But the sharp increase in tariffs made Swiss watches less competitive than the inferior American brands.  What the United States may have gained in shutting out Switzerland was more than lost when Switzerland passed retaliatory tariffs and refused to import U.S. cars, typewriters, or radios.

He continues, saying that "the Smoot-Hawley tariff was a direct attack on our home economy.  When we pay more for American-made watches and wool blankets than foreign-made substitutes, we are able to buy fewer American made [sic] radios, cars, or telephones."

Now, Trump's steel tariff is not Smoot-Hawley, and I'm not suggesting it's the same in scope.  That bill taxed 3,218 imported items.  And Trump is taxing steel and aluminum imports while enjoying executive flexibility to carve out exemptions for, say, Mexico and Canada that did not exist in 1930 (thanks to the 1962 Trade Expansion Act, which broadened executive scope in trade). 

But history has been pretty clear about one thing: tariffs create negative consequences beyond the "saving American jobs and industry" that have been routinely pitched to justify them.

This brings us back to steel.

In the vein of Folsom's argument that a tariff is an unrecognized "direct attack on our home economy," famed economist Walter E. Williams noted in 2016 that we should "examine not only what is seen but what is unseen" when it comes to tariffs.

He argues that the 2002 George W. Bush tariff levied taxes on imported steel of 8 to 30% "in an effort to save jobs and protect the ailing steel industry."

The domestic price of some items, such as "hot rolled steel," rose by as much as 40%.  Yes, it benefited "1,700 or so" steelworkers.  But without question, "steel users" such as "the auto industry and its suppliers, heavy construction equipment manufacturers," were "harmed" by the tariff.  "It is estimated," Williams continues, "that the steel tariffs cost 4,500 job losses in no fewer than 16 states, with more than 19,000 lost in California, 16,000 in Texas, and about 10,000 each in Ohio, Michigan and Illinois."

"It would have been cheaper," Williams says, "to tax ourselves and give those steelworkers a $100,000 annual check."  It would have been less costly but "politically impossible.  Why?  Because the costs of protecting those steel jobs would have been apparent and thus repulsive to Americans.  Tariffs conceal such costs."

So what's different today?  China is "dumping" steel at $200 a ton when the going rate is $500 a ton because the Chinese are able to find fewer buyers in their flagging industrial production marketplace?  And it's not just their flagging economy.  The expected slowing global demand for steel in 2018 was discussed in 2017, so what we have here is a global overabundance of product, which naturally yields a reduction in price.

How is such a thing anything but a boon to the American economy, where there are roughly 120,000 steelworkers but roughly six million workers who rely upon steel consumption for their industries' health?  Isn't the net benefit of such reduced production cost due to cheaper imports a much larger net benefit for all Americans than temporarily protecting some of those steelworkers' jobs by demanding that all of those other companies purchase their steel at a higher price than a willing seller might offer?

As Mercatus Center senior research fellow Dan Griswold explains, "[t]hree-quarters of the steel used in the United States is within the construction industry, the automobile industry, the energy sector, you've got appliances ..."

That's a lot of potentially reduced cost to a lot of industries, and the benefit of cheaper steel could translate to a lot of economic growth and a lot of less expensive goods for American citizens.

This isn't rocket science, and we shouldn't kid ourselves to believe that Trump's tariffs are about economics.  It's politics. 

China has massive tariffs on imports, which has arguably led to its flagging economy.  Why we should follow that country's lead is beyond me.

When you frame it as a political move, I understand why people say we should place a tariff on Chinese steel as retaliation for China's heavily taxing our exported products.  But that's essentially an economic sanction upon a political enemy, not something that will yield practical economic benefit to our country.  And it's certainly not something that will "save American jobs" or be of net benefit to the American people as a whole, unless you consider our pressing of the Chinese government as something that will yield some sort of long-term benefit beyond the prospect of a trade war or, God forbid, actual war.

William Sullivan blogs at Political Palaver and can be followed on Twitter.

*Folsom, Jr., Burton.  New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America.  New York, NY.  Threshold Editions, 2008, pp 31-32.

I've noticed recently an interesting dichotomy of general presumptions being made by President Trump's most fervent supporters.  It goes like this.  If you're for Trump's protective trade policy demanding tariffs on imported steel and aluminum, you're a patriot who's looking to protect American workers' jobs.  If you're against that policy, you're a globalist cuck who doesn't care about American workers.

It's an incredibly unjust framing of the argument, because there are myriad legitimate doubts about the efficacy of Trump's protectionist trade policy.  Inexhaustible amounts of evidence exist to suggest that such policies do little to spur economic growth, at best, and at worst, they are economically destructive.

First of all, the steel industry is thriving and has been growing in America.  We are the fourth largest steel-producing nation in the world, and the steel industry has seen substantial growth in recent years.  It simply happens to be doing that with fewer workers. 

That's not the result of our nation being the victim of some predatory trade policy of foreign nations.  It's the result of innovation and global competition, two inescapable realities in any free marketplace, neither of which is a bad thing.

But Trump continually touts that steel imports have created an "unfair" balance of trade, leading us to have deep trade deficits with certain countries.

Let's pretend that the opposite of the dreaded trade deficit, a trade surplus, is some kind of economic Nirvana that we are desperate to achieve, as the argument seems to be. 

We've experienced that several times in the past.  Here's an example of a time when we had a pretty large, sustained trade surplus: every single year of the Great Depression.

Any guesses as to how we achieved that?

There are several reasons for the Great Depression, but you'd be hard pressed to find economists who don't give a lot of the credit for those awesome trade surpluses to the Smoot-Hawley tariff.

There is an open question as to whether the Smoot-Hawley tariff factored heavily into the stock market crash of 1929, but there is no question that the tariff attributed to the depth of the Great Depression and the severity of the trade war which followed.  As Burton Folsom, Jr. describes in New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America,* Smoot-Hawley "instituted the highest trade tariff in American history" and was a major contributor leading to the Depression:

Foreigners were understandably outraged.  In Switzerland, for example, the leading industry was watch (and clock) making, and the leading customer for these timepieces was the United States.  But the sharp increase in tariffs made Swiss watches less competitive than the inferior American brands.  What the United States may have gained in shutting out Switzerland was more than lost when Switzerland passed retaliatory tariffs and refused to import U.S. cars, typewriters, or radios.

He continues, saying that "the Smoot-Hawley tariff was a direct attack on our home economy.  When we pay more for American-made watches and wool blankets than foreign-made substitutes, we are able to buy fewer American made [sic] radios, cars, or telephones."

Now, Trump's steel tariff is not Smoot-Hawley, and I'm not suggesting it's the same in scope.  That bill taxed 3,218 imported items.  And Trump is taxing steel and aluminum imports while enjoying executive flexibility to carve out exemptions for, say, Mexico and Canada that did not exist in 1930 (thanks to the 1962 Trade Expansion Act, which broadened executive scope in trade). 

But history has been pretty clear about one thing: tariffs create negative consequences beyond the "saving American jobs and industry" that have been routinely pitched to justify them.

This brings us back to steel.

In the vein of Folsom's argument that a tariff is an unrecognized "direct attack on our home economy," famed economist Walter E. Williams noted in 2016 that we should "examine not only what is seen but what is unseen" when it comes to tariffs.

He argues that the 2002 George W. Bush tariff levied taxes on imported steel of 8 to 30% "in an effort to save jobs and protect the ailing steel industry."

The domestic price of some items, such as "hot rolled steel," rose by as much as 40%.  Yes, it benefited "1,700 or so" steelworkers.  But without question, "steel users" such as "the auto industry and its suppliers, heavy construction equipment manufacturers," were "harmed" by the tariff.  "It is estimated," Williams continues, "that the steel tariffs cost 4,500 job losses in no fewer than 16 states, with more than 19,000 lost in California, 16,000 in Texas, and about 10,000 each in Ohio, Michigan and Illinois."

"It would have been cheaper," Williams says, "to tax ourselves and give those steelworkers a $100,000 annual check."  It would have been less costly but "politically impossible.  Why?  Because the costs of protecting those steel jobs would have been apparent and thus repulsive to Americans.  Tariffs conceal such costs."

So what's different today?  China is "dumping" steel at $200 a ton when the going rate is $500 a ton because the Chinese are able to find fewer buyers in their flagging industrial production marketplace?  And it's not just their flagging economy.  The expected slowing global demand for steel in 2018 was discussed in 2017, so what we have here is a global overabundance of product, which naturally yields a reduction in price.

How is such a thing anything but a boon to the American economy, where there are roughly 120,000 steelworkers but roughly six million workers who rely upon steel consumption for their industries' health?  Isn't the net benefit of such reduced production cost due to cheaper imports a much larger net benefit for all Americans than temporarily protecting some of those steelworkers' jobs by demanding that all of those other companies purchase their steel at a higher price than a willing seller might offer?

As Mercatus Center senior research fellow Dan Griswold explains, "[t]hree-quarters of the steel used in the United States is within the construction industry, the automobile industry, the energy sector, you've got appliances ..."

That's a lot of potentially reduced cost to a lot of industries, and the benefit of cheaper steel could translate to a lot of economic growth and a lot of less expensive goods for American citizens.

This isn't rocket science, and we shouldn't kid ourselves to believe that Trump's tariffs are about economics.  It's politics. 

China has massive tariffs on imports, which has arguably led to its flagging economy.  Why we should follow that country's lead is beyond me.

When you frame it as a political move, I understand why people say we should place a tariff on Chinese steel as retaliation for China's heavily taxing our exported products.  But that's essentially an economic sanction upon a political enemy, not something that will yield practical economic benefit to our country.  And it's certainly not something that will "save American jobs" or be of net benefit to the American people as a whole, unless you consider our pressing of the Chinese government as something that will yield some sort of long-term benefit beyond the prospect of a trade war or, God forbid, actual war.

William Sullivan blogs at Political Palaver and can be followed on Twitter.

*Folsom, Jr., Burton.  New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America.  New York, NY.  Threshold Editions, 2008, pp 31-32.