President Trump
fired the opening salvo in a trade war—reminiscent of the 1930s
trade war from the Smoot-Hawley Act, which prolonged the Great Depression—when he announced he will
impose tariffs of 25% and 10% on imported steel and aluminum.
Chinese officials quickly responded saying they would impose a 25%
tariff on 106 U.S. products, including automobiles, pork, soybeans,
fruit, nuts and other goods amounting to $50 billion on imports from the U.S.
That roughly matched the scale of tariffs the U.S. government
proposed on China the previous day. This is exactly how trade wars
begin. Trump then hit back by threatening as much as $60 billion more
in other tariffs and restrictions.
Trump tweeted,
“Trade wars are good and easy to win.” Actually they are bad and
impossible to win. When a trade—whether between individuals or
countries—is freely made, it is a win-win situation, because both
sides judge it to be in their interest. That is why countries with
relatively free markets are more prosperous than those those without
them. Government economic mandates are at best win-lose and often
become lose-lose by victimizing not only one side to benefit the
other but also by forcing a chain of secondary losses throughout the
economy—as well as often victimizing the very people they are supposed
to benefit.
For example,
the tariffs on steel and aluminum are intended to benefit those
industries and their workers but will also increase the cost of
production for American firms that use those metals. So there will
be lower production from U.S. manufacturing and less employment. The
American steel industry employs 147,000 workers, while 6.3 million
workers are directly employed in the steel-using industry. Thus
about 16 times more workers are employed in steel-consuming
industries than steel workers producing the metal. Economists Joseph
Francois and Laura Baughman show that more workers (200,000) lost
jobs because of George W. Bush's tariff on steel than were employed
in the entire U.S. steel industry (187,500).
Rising prices
of American steel and aluminum will not only mean higher costs for
cars in the U.S. but leave the U.S. Big Three less able to compete
with foreign auto companies. This will be counter to the effort to
sell more American cars overseas to reduce the trade deficit. Goldman
Sachs estimates that the tariffs would cost both GM and Ford $1
billion. Harley-Davidson may have to lay off 1,200 steel workers
because the company relies on a special Russian steel not available
from U.S. manufacturers.
Steel is used
in natural gas pipelines, railroads and bridges. The steel tariff
will make it more costly to maintain and replace the nation's
infrastructure. There are 126 million households in the U.S. that buy
appliances such as refrigerators, freezers, and stoves that utilize
large quantities of steel and will now be higher priced. And
aluminum is widely used in dozens of common products, including even beer cans and soda cans, accounting for
about half the cost of a can.
China is the
second-biggest customer for U.S. agricultural exports, after Canada.
Trump's proposed tariffs, leading to retaliatory measures by China,
will worsen the U.S. farm economy's slump that has already pushed
some farmers out of business and eroded profits from seed, chemical
and equipment companies.
The
government's corn ethanol mandate provided generous tax credits and
subsidies to stimulate demand for ethanol and other biofuels. This
soon diverted 40% of America's corn crop away from the food supply.
This government “gift” to the ethanol advocates was paid for by a
government-imposed shortage that boosted the long-term mean levels
for corn from about $2 per bushel to more than $8 per bushel in 2012.
This price surge produced a range of harmful responses. Farmers
planted 17 million new acres of corn and reduced the acreages of
soybeans, wheat, hay and cotton, driving their prices to new highs,
too.
Cattle farmers,
unable to afford corn for feed, reduced their herds to levels not
seen in 60 years. In the five years 2007 to 2012, beef prices rose
60%, and the International Monetary Fund food price index increased 42
percent.
The country
endured an enormous amount of economic disruption by trying to foist
an uneconomic fuel on the public in place of an economic
one—gasoline. The government's decision was not based on economics
but on politics. The economic solution is always the free-market
solution. A political solution is always uneconomic because it
confers on some a benefit at the expense of others whose compliance
must be forced—by the
police power of
government because it is counter to the interests (and rights) of
others. So then it is necessary for a bureaucracy to administer the
tax credits and subsidies, none of which are needed in a free market.
The
bureaucracy also finds it necessary to ameliorate the effects of
uneconomic political policy on friendly foreign governments. For
example, Trump claims the tariffs on imported steel and aluminum are
intended to improve the balance of trade with China. But steel
imports from China account for only 3% of U.S. steel usage, and
Canada provides 43% of our aluminum imports—more than twice as much
as China and Russia combined. The four
largest sources of our foreign steel imports are Canada, Brazil,
South Korea and Mexico. Canada and Mexico are our good neighbors,
and South Korea is a key alley in Asia. So our bureaucracy must
carve out exceptions or waivers to protect these friendly governments
from the worst effects of our tariffs. Again, this is a bureaucratic
function that is unnecessary in free markets.
If
President Trump does not understand the economic effects of tariffs
we have just explained—and believes “trade wars are good and easy
to win”—then we have a president who is economically illiterate
(as well as oblivious to the Constitution). And he has learned
nothing from our history under the Smoot-Hawley Act.
Finally, environmental concerns are not a valid reason for
political decisions to override economic facts (or constitutional
principles). A political decision here based on the threat of
so-called global warming cannot be a rational solution because the
the environmental effects are worse for the uneconomic solution. For
example, among many similar studies, a 2010 Congressional Budget Office study of corn-based
ethanol found it terribly inefficient, with government spending
astronomically more—$754 per metric ton—for avoided carbon
emissions, compared with other policies. And a 2008 study in the
journal Science found
that biofuel production can produce hundreds of times more carbon
emissions than the biofuels themselves.
