Tariffs and their impacts explained
President Trump announced last week that he would seek tariffs on imported steel and aluminum. What will the impacts of these tariffs be, and do they constitute wise policy?A tariff is a tax imposed on items imported to the U.S. The proposed 25 and 10 percent tariffs on steel and aluminum will make imported metals more expensive, increasing domestic production of these metals. President Trump will impose the tariffs via executive order, since Congress decades ago gave the president relatively broad discretion to impose tariffs for national or economic security. The Commerce Department determined in February that steel and aluminum imports threaten security, allowing this action.
The president intends to boost domestic steel and aluminum production. The first element of good policy is accomplishing the intended goal. The tariffs do this.
Increased domestic production will come at a cost. Steel and aluminum are used to make consumer goods like cars, lawn mowers, and beverage cans. Furthermore, there are dozens of types and grades of steel. American companies are very good at making some types of steel, while foreign companies are quite good at making other types. No American companies currently make some types of steel.
Manufacturing is efficient when producers of cars, mowers, and cans can purchase the best product at the best price. The tariffs will increase the cost of manufacturing in the U.S., reducing output and employment in industries using these metals. Consumers will face higher prices as well.
The second and more significant element of wise policy is ensuring that the benefits exceed the costs. Is there a compelling reason to protect domestic metals production?
We might think that such protection could spur the labor market. Employment is currently less than 100,000 and 30,000 in aluminum. Based on current import penetration, eliminating all imports – which these tariffs will not do – might in time create 50,000 additional jobs. This total is modest relative to our economy’s 150 million total jobs and 60 million jobs filled annually, and would be at least partially offset by job losses in manufacturing. And January’s 4.1 percent unemployment rate signals a currently strong labor market.
President Trump has spoken often about economic dangers from China. China is only our 11th largest steel supplier; we import the most steel from Canada, South Korea, Brazil and Mexico. Regardless of whether trading less with China is desirable, these tariffs will not really achieve this goal.
The identity of our largest steel trading partners, I think, also allays national security fears. If we feared some security scenario requiring significantly greater domestic production, we could pay American companies to mothball recently closed plants. We do not need to punish automakers daily to prepare for a contingency which may never arise.
Competition from foreign producers receiving government assistance provides, I think, the strongest argument for ever protecting American industries. Government assistance violates the rules of the market, raising economic and justice concerns. Economic efficiency requires that the firms producing the best different steel and aluminum products win out. Export subsidies encourage production by firms which are not the most efficient. Plant closings devastate families and communities. This pain can be justified as like recuperation from surgery if the closings improve economic efficiency. Pain which does not improve the economy is hard to justify.
Are steel producers losing because of unfair trade? The World Trade Organization allows remedies in response to documented unfair trade practices. As of June 2017, American steelmakers had 149 remedies in place, including 24 against China. We had 18 remedies against South Korea (second most after China), yet only eight, six, and zero against Brazil, Mexico, and Canada. Competition in steel seems reasonably fair.
The response of our trading partners provides a final variable here. Our trading partners may impose tariffs against American products in retaliation. No one knows if President Trump’s tariffs will spark a trade war, but wars almost always injure many innocent parties.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.