Sunday, April 29, 2018
Welcome to the 1930s
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.