Last week, Donald Trump announced new tariffs on steel and aluminum. These are industries he promised to protect in the campaign, and he’s following through. But at what cost?
The vast majority of economists will argue that free trade is a net benefit to the U.S. economy. But a net benefit hides the fact that some people lose. I get it.
Those in industries that face serious foreign competition rarely turn out to be winners. But let’s not discount the benefits of free trade.
Consumers win because they pay less for various goods, and jobs are created in export-oriented industries.
Did you know that last year U.S. exports totaled $2.3 trillion, according to the U.S. Bureau of Economic Analysis? Yes, that’s trillion with a T. It’s not small change.
There are many more Americans that work for U.S. manufacturers that consume steel and aluminum than those who produce the metals.
Think about it: aluminum cans, farm equipment, construction equipment, aerospace, autos and parts, machinery, pipeline makers, and drilling equipment.
Trump has promised energy dominance, but he just created a new hurdle for energy producers that are voracious consumers of steel and aluminum. Not surprisingly, the industry has denounced the new measures.
At the margin, it raises costs and modestly boosts inflation. It could also force some U.S. manufacturers to put projects back on the shelf, move production offshore, or disrupt plans by foreign firms that had considered moving factories into the U.S.
And it doesn’t stop there. U.S. tariffs invite retaliation, pressuring exporters and jobs/profits in globally competitive sectors. The biggest concern: it could spiral into a tit-for-tat trade war.
America is open for business
That’s the message Trump resoundingly and unequivocally proclaimed to the world at Davos in January. It wasn’t an exercise in rhetoric; his words were backed by concrete actions.
His administration has launched an assault on regulatory excess. The tax cuts that just passed Congress favor business and production and make the U.S. a more attractive location to set up shop.
He’s now sending the world a mixed message.
At the margin, steel and aluminum tariffs won’t offset his pro-business policies. But unwarranted tariffs may lead to a nasty trade war, which no one wins.
It creates uncertainty for investors, increases prices for consumers, and could harm efficient job-creating sectors that are wrestling market share from global competitors.
Trump has signaled he’s willing to negotiate, but it’s a very risky strategy as our allies may be in no mood to give ground. It’s an exercise in economic alchemy.