The Inevitable Failure of Trump’s Tariffs
Ryan Shean, Darmouth Business Journal
Steel tariffs will allow American steelworkers to keep their jobs, help the American domestic economy, reduce United States’ dependency on China as a trading partner and foster the growth of the middle class.
This was the logic that motivated Donald Trump to impose a 25 percent tariff on steel and 10 percent tariff on aluminum on all countries except Mexico and Canada on March 23, 2018. This decision, while politically popular among his supporters who advocate for the steel industry, is incorrect in its assumptions and harmful to America as a whole. History and economic theory demonstrates that these tariffs will be bad for the economy in the short and long term.
Historically, tariffs have adversely affected the United States economy. The Smoot-Hawley Tariff, enacted in 1930, was arguably the largest in American history. This piece of legislation levied taxes on over 20,000 goods. According to Robert Whaples of the Economic History Association, there is a consensus among economists that the Smoot-Hawley Tariff exacerbated the effects of the Great Depression.
Other tariffs have had similar effects on the economy. More recently, President George W. Bush implemented steel tariffs on March 5th, 2002. These ranged from 8 percent to 30 percent and were implemented in response to the collapse of many steel-producing companies. The United States’ International Trade Commission estimates that these tariffs created a loss of around 41 million dollars to the U.S. economy. In addition, thousands of steelworkers lost their jobs. The tariffs reduced the amount of steel into the United States economy, inevitably creating a 9.2 percent steel price increase. As a result, around 200,000 jobs in all steel-consuming industries were lost in 2002 according to a Lancaster University study by Robert Read. Since steel-producing industries only account for 190,000 jobs, the net result on employment of this policy was incredibly negative. Because of the negative effects of this action, the Bush administration decided to revoke these tariffs on December 4th, 2003. Simply reducing the imports does not improve domestic conditions. Successful domestic firms are not competing against international firms; therefore, they will not be efficient enough to export their goods to other countries. Furthermore, American citizens will be less likely to purchase these goods for higher prices. This creates market conditions that aren’t conducive for success in the long term. Even if tariffs are imposed on just one product like steel, the negative effects will extend to a variety of industries.
Still, roughly 70 percent of Republicans and 25 percent of Democrats support President Trump’s decision to implement steel tariffs. These numbers are a result of the belief that tariffs can help expand the ever-decreasing American middle class. However, the fact that technology is advancing at such a rapid pace and automation is becoming more popular leads to a lower demand for labor in manufacturing jobs. As capital becomes more efficient, fewer workers will be necessary. In 1950, the number of steelworkers in the United States was around 650,000. Today, this number has fallen to 140,000. This number will continue to decrease as technology improves. Tariffs will not stop the inevitable jobs loss in the steel and aluminum industries. Instead, they will decrease jobs in other industries. A strong, concentrated political interest in favor of the steel tariffs currently outweighs the weak, diffuse interest in opposition to the steel tariffs. Because steelworkers benefit greatly from these tariffs, they will have a large incentive to passionately support President Trump’s policy. On the other hand, the greater number of people who would be harmed by the implementation of steel tariffs do not believe their jobs are in jeopardy. Therefore, there will be significant passion and political support behind the steel tariffs, even though they harm America as a whole.
The recent steel tariffs had immediate negative effects on the U.S. economy. The day the steel tariffs were put in place, the S&P 500 dropped from around 2,750 points to around 2,590 points. While there is limited data on the effect on employment and GDP, we can use history and economic theory to predict the full effect of these tariffs.
Steel and aluminum are present in everything from cables to cars. Accordingly, steel tariffs raise prices on items that hard-working Americans need in their daily lives. Joseph Amaturo from the Buckingham Research Group estimates that these tariffs will raise the price of cars by 300 dollars per vehicle. The actual effect of this is to lower the income of the rest of America at the expense of just steelworkers. This will reduce the amount of money that people have to spend and invest to grow other segments of the economy.
Additionally, raising tariffs could cause harmful economic effects if other countries choose to retaliate. In fact, the United States has already suspended the tariff on the European Union, Australia, South Korea, Brazil, and Argentina, some of the biggest exporters of steel into the American economy. The result of putting this tariff into effect only in certain countries will only benefit the countries which have been exempted from this tariff.
Furthermore, the fact that some of the biggest exporters of steel are exempted shows that this tariff does not even serve its intended purpose. The exempt countries will still export enough steel into the American economy to drive American steelworkers out of their jobs at a similar rate. This tariff only strains relations with countries who aren’t exempted, while effectively maintaining the quantity of steel imported.
Just like President Bush did in 2003, President Trump should recognize that his decision to put in place steel and aluminum tariffs is damaging to the United States as a whole. However, that does not seem to be the case right now. While some steelworkers may lose their jobs consistent with global demand and technology changes, more Americans will be able to keep jobs in related industries and the average American will be more able to afford everyday goods without the tariff. Because people are able to save more money, they will choose to invest more of that money. This will have the effect of creating jobs in other industries that are competitive in the global economy, like technology, rather than attempting to sustain unsustainable jobs. The American economy would be more prosperous, vibrant, and efficient without these tariffs.