President Trump announced this week that he would keep his campaign promise to impose tariffs on steel and aluminum imported into the United States. Unfortunately, this promise would be better left unkept. Coming on the heels of Mr. Trump’s successful and increasingly popular tax reform, which boosted the economy and put money in the pockets of American voters, his tariffs are likely to have the opposite effect.
While intended to protect the US steel industry, the problem is that Trump’s tariffs will damage other US manufacturers and take money away from consumers. While the steel industry is likely to favor the new rules, other American companies that use steel as a raw material to make other finished products are not happy at all.
Companies that build products from automobiles to aircraft to beer use steel and aluminum as components. Under the new tariffs, they will either be forced to buy from American companies, which may be more expensive than foreign competitors, or pay a 25 percent tax on imported steel. This increased cost will ultimately be passed along to consumers.
In the end, a tariff is a tax and the consumer bears the cost of taxes on businesses. Conservatives instinctively understand that sales taxes and increases to the minimum wage mean higher costs, but the same logic escapes many on the right when it is applied to tariffs, which are nothing more than a tax on trade.
As with an increase to the minimum wage, a higher cost for materials translates into lost jobs. Tariffs may save, at least temporarily, thousands of steelworker jobs, but the cost may be hundreds of thousands of jobs in other industries.
As prices increase due to higher costs for materials, demand for finished goods decreases. If there is less demand for an item, then there is also less need for the workers who produce it. If the price of cars or beer goes up, then companies sell fewer cars and less beer. Those companies slow production and work hours get cut back or workers get laid off.
The tariffs will also hit American consumers directly. Any product that contains steel or aluminum will be more expensive. It doesn't take a rocket scientist to realize that if goods are more expensive, then people must buy fewer things. The standard of living goes down.
Henry George, an economist who inspired Milton Friedman, argued that tariffs hurt the country that imposes them. “Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same — to prevent trade,” George wrote. ”The difference between the two is that blockading squadrons are a means whereby nations attempt to prevent their enemies from trading. Protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.”
President Trump argues that the United States should mirror tariffs that other countries apply to our exports. What Trump fails to realize is that those countries are penalizing their own citizens. The US has one of the highest standards of living in the world. This is largely because of free trade. Chinese companies may benefit from tariffs, but it is at the expense of Chinese citizens who must maintain a lower standard of living.
Some argue that Chinese steel producers are unfairly dumping steel on US markets at artificially low prices. In reality, China ranks tenth among US steel imports. If Chinese steel was really far below market prices, the demand for it would be very high. China’s market share should be much larger than 2.9 percent.
What about the trade deficit that Trump railed against during the campaign? It isn't a bad thing. Milton Friedman explained what he called ”upside-down thinking” about trade deficits.
”The gain from foreign trade is what we import,” Friedman said. ”What we export is the cost of getting those imports. And the proper objective for a nation, as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible.”
In other words, imports raise a nation’s standard of living. Exports are the cost of getting imports. Trying to increase the amount of exports is like telling a store clerk that he isn't charging you enough for your groceries.
If President Trump wants to boost the economy and give Americans more purchasing power, he should scrap his plans to implement tariffs. This is especially true since the levies may well be the first round in a trade war that could severely damage the world economy. The Smoot-Hawley tariff of 1930 was a prime reason that the 1929 downturn became the Great Depression.
It would be tragic to implement such a damaging trade policy so quickly after the successful tax reform bill. Tax reform giveth, but Trump’s tariffs taketh away.