April 7, 2020

Economic Folly

By Stephen Tuttle | March 10, 2018

Our president, after saying he was going to slap a 25 percent tariff on steel and a 10 percent tariff on aluminum, said he believes trade wars are “good,” and winning them is “easy.” No, he really said that.  

It seems to be a theory unique to him. Economists, historians, Republicans, Democrats and American companies who would be impacted were befuddled. The president's chief economic adviser, Gary Cohn, resigned because of his opposition to the tariffs. There is no economic theory suggesting trade wars are good or ever won by anybody. 

We started the last real trade war in 1930 by passing the Smoot-Hawley Tariff Act. With the Depression looming, the idea was to protect American farm prices from being undercut. But by the time Congress got through with it, there were hundreds of new tariffs on hundreds of products.

Countries around the world retaliated by imposing tariffs on American imports. Even Canada retaliated, slapping a tariff on eggs, which reduced our exports there by more than 90 percent. Overall, our exports fell 40 percent and, instead of jobs being protected, our unemployment rate soared to 25 percent. 

Smoot-Hawley didn't cause the Great Depression but it guaranteed it would be worse and last longer. Trade wars are not good.

We're now being told the tariffs are actually aimed at China's underpriced dumping of steel on world markets. There aren't enough dots to connect the logic.

China isn't even in the top 10 of countries exporting steel to the United States. We import the most from Canada, Brazil, South Korea, and Mexico, all of which are supposed to be allies. 

And several of the steel manufacturers in the United States that the tariffs supposedly protect aren't American companies at all. A company from Luxembourg owns mills that produce 16 percent of the steel made in this country. Other steel operations are owned by companies from Russia, Mexico, and Brazil.

Tariffs on steel and aluminum, which consumers will end up paying, are especially costly.

Everything made with either product will cost more. That would include vehicles, engines, aircraft, light poles, cans, boats, construction beams, bridges, bicycles, appliances large and small, buildings ... it's a very long list. And all of it will cost more. All of it. 

There might be some short-term job savings for the steel industry. But their biggest job pressure comes not from cheaper imported steel but from automation. Automated processing is quicker, more efficient, more reliable and cheaper in the long run. The future of blue collar industrial jobs is robotics; companies that refuse to move in that direction will surely be left behind.

The few jobs tariffs save will be offset by a peripheral job loss that could be substantial. When President Barack Obama slapped a tariff on imported Chinese tires in 2011, the idea was to save jobs in the American tire industry. And, according to the Peterson Institute for International Economics, about 1,200 jobs in the industry were saved. But since tires were more expensive, fewer were sold, and about 4,000 jobs in the retail end of the business were lost. As a bonus, China retaliated by putting a tariff on chicken parts imported from the United States, costing that industry about $1 billion. 

Even our normally friendly and reliable trade partners will retaliate this time. The European Union has already indicated they will start with tariffs on blue jeans and bourbon and work their way up. 

China's most likely retaliation target is food products. That would hurt here at home. Michigan exports nearly $3 billion worth of food products annually, and China is one of our top three customers. Greater expense to the Chinese consumer means lower sales for Michigan growers and companies, and that puts jobs at risk.

President Trump sees a single side of this equation; if foreign steel and aluminum costs more, we'll buy more American steel and aluminum, and save American jobs. Unfortunately, he has ignored the second part: Dozens of consumer goods become more expensive, and American exports subject to retaliation decrease.

It is entirely possible, maybe even likely, the president will have changed his mind by the time you read this. He's a bit mercurial that way, having now taken five positions on immigration and three on gun control. It seems to depend on whom he's spoken with last. 

The economy has been creeping along nicely. The bumps in the stock market have been both anticipated and necessary. Real income is increasing, unemployment is low, entrepreneurship is at an all-time high. Increasing the cost of consumer goods and slowing our exports will offset every gain we've made since the dark days of the recession.

A trade war is economic folly. It isn't a business deal or a reality show. And there won't be anything “easy” about higher prices, higher unemployment, and higher discontent.



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