Trump recently called for a 25 per cent tariff on imported steel and a 10 per cent tariff on imported aluminum. A tariff is simply a tax placed on imported goods. The strategy for their use is to raise the price of imported goods higher to give an edge to domestic companies that are trying to compete.
To say the response to this proposed tariff was negative is an understatement. Industries that rely on steel and aluminum to manufacture products are universally unhappy because one of the immediate side effects of an applied tariff will be increased prices and inflation. Now that American steel and aluminum companies do not have to compete with international prices, they can, and will, raise their own prices. That leads to job losses among workers of industries reliant on steel or aluminum, and to increased prices for consumers. The last major round of steel tariffs, imposed by Bush in 2002, did more harm than good to the U.S. economy, several studies later concluded.
The only smiling faces after Trump’s announcement belonged to steel and aluminum executives. They have been lobbying hard to see this kind of action for years because of concerns for loss of business to competitors that receive government subsidies and practice “dumping” in countries like China. (Dumping is when a company exports a product at a price that is lower than the price charged in the exporter’s domestic market).
Here’s Why Trump’s Decision Is Not Based on Economic Fundamentals
He must have his reasons, but they are not based on any economic fundamentals.
The steel industry currently employs around 140,000 people according to the U.S. Bureau of Labor Statistics That’s it. Fifty years ago, the industry employed a much more significant portion of the work force of over 650,000 people.
Did all these jobs go away because of international trade? No. They went away because of increased efficiencies in the industrial process.
Now look at how many people are employed in manufacturing jobs that require steel in their products who might be impacted by the rising price of steel. It’s eighty times the number – over eleven million workers.
Trump seems to have a knack for focusing his presidential power on helping a small segment of the U.S. economy. Last time, it was coal miners.
China’s unfair trade tactics has been Trump’s bugaboo and rallying call since before he started campaigning. Indeed, China has been heavily subsidizing its steel producers. During Obama’s tenure, the Commerce Department International Trade Administration applied duties of 236% to offset Chinese government subsidies of its steel producers. Even more anti-dumping duties were applied later. Since then, Chinese steel imports to the U.S. has dropped like a stone. They have not been a significant importer of steel into the U.S. for some time.
Does Trump even know this?
The Real Risk
The potential for job loss and rising prices for products containing metal isn’t the real concern. U.S. manufacturers are good at sourcing less expensive product, and a one cent increase on the cost of beer cans probably won’t be notices by consumers. The real fear is Trump’s poorly conceived plan will infuriate his allies and trade partners to a degree that could quickly lead to retaliation and trade wars. Defense Secretary James Mattis warned Trump that tariffs should be targeted ‘so as not to damage relationships with allies’, but the president didn’t bother to listen to him.
The negative impact of Trump’s tariff will be in Canada – the number one supplier of both steel and aluminum to the U.S. Last year, Canada exported about $9.3 billion CAD of aluminum and $5.5 CAD billion of steel to the U.S.
Foreign Affairs Minister Chrystia Freeland described the idea of tariffs on Canada as absolutely unacceptable. "…Canada will take responsive measures to defend its trade interests and workers."
Other affected countries are already planning to retaliate by slapping tariffs on American goods, and God knows where that will end up. History shows there are few winners in an all-out trade war. The trade wars in the 1930 were absolutely disastrous. World trade fell by 66 per cent from 1929 to 1934. Exports between the U.S. and Europe also dropped by two-thirds.
Smoot-Hawley instituted the first tariffs to protect U.S. farmers, but it quickly became a political game of “if you support my tariff, I’ll support yours” until nearly 900 tariffs were put into place on a wide range of imported products.
Canada led the retaliation. Prime Minister Mackenzie King raised tariffs on U.S. exports to Canada. Then R.B. Bennett boosted them further and Canada sunk into the Depression.
It’s laughable that Trump tweeted a few hours ago that a trade war would be “easy to win.”
Sure, maybe the U.S. would win a trade war. But at what cost to both countries if we decide to once again play chicken?
George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”
Markets are on edge and jittery. There are very few details about the new tariffs and how they will be implemented, so it’s really the ‘what’s next’ that is worrying everyone. Trump’s ill-conceived and poorly implemented policy could undermine the entire system of North American and global trade.