Last Thursday Donald Trump announced an intention to slap a 25 % tariff on steel imports, as well as a 10 % tariff on aluminum imports. This may very well be his worst idea yet – and that’s saying something!
So why are these tariffs a bad idea?
- Comparative advantage is a real thing. I come from Sweden, a cold country in Scandinavia with a climate that most closely resembles that of Minnesota. Here’s the thing: If we really wanted to, we could grow watermelons. Sure, we’d need gigantic greenhouses to do so, and those watermelons would probably cost $20/lbs, but we could do it. If we insisted on only having Swedish watermelons sold in Sweden, we could slap massive tariffs on all foreign watermelons and create loads of jobs in the Swedish watermelon-industry.But who would really be taking the hit? Well, the Swedish watermelon consumers of course! In particular, those with low incomes, since they are more sensitive to price increases and may be priced out of the market. If we have to spend more money on watermelons, that means less money for everything else, so while we may create jobs in the watermelon business, those jobs are taken from other industries. And this goes for steel and aluminum too! Trade is not a zero-sum game; it’s an “everybody gets a trophy”-competition where all who participate win.
- The US barely imports any steel at all from China. Those defending the tariffs claim that the US has to hit back against China for their shady practices like currency manipulation. There may be some validity to that, but here’s the thing: Only 1 % of US steel imports come from China! Yes, that’s right: One percent. And these tariffs do not only apply to Chinese steel/ aluminum, but to all countries. Do you want to know which country sells the most steel to the US? Canada. Oh, and South Korea. And Japan. In other words, all friendly, long-time allies. These are the countries that may actually be hurt and that are now likely to retaliate, sparking a trade war.If Trump wanted to get back at China, why not target only China and leave America’s allies alone? And why not slap the tariffs on something that China actually exports to the US to a significant degree?
- Tariffs on steel and aluminum will increase the US trade deficit and unemployment. The thing about both steel and aluminum is that they are raw materials. You probably won’t go into a shop and pick up a pound of pure steel, but you may pick up some steel bolts if you’re working on a hobby project. Most manufacturers don’t produce steel/ aluminum; they merely turn these materials into consumer products. Car manufacturers are a prominent example.So what happens now to a company like Chrysler when Trump slaps tariffs on steel/ aluminum? Tariffs mean that Chrysler’s cost of production increases since they now can’t buy cheap foreign steel. Either they buy expensive foreign steel, or expensive American steel – either way, it’s an increased cost. This cost will then be passed on to consumers in the form of higher prices on all Chrysler cars. Higher prices equal a lower demand, so Chrysler doesn’t get to sell as many cars as before. Chrysler now has to fire employees as they don’t need as many of them as they did before the tariffs.
But wait there’s more! Chrysler and all other auto firms also export cars. Now that their prices are higher, they’re less competitive internationally, thus reducing US exports. The purpose of a tariff is usually to reduce the trade deficit, but these specific tariffs actually end up increasing the trade deficit because American firms are so reliant on the raw materials in question, and they are used in products that America exports. Chrysler is of course just an example; steel and aluminum are used in everything from bikes, cutlery and coke cans to houses! This will hurt America’s international competitiveness and widen the trade deficit, as well as increasing unemployment. Yes, there might be a small bump in employment in the steel/ aluminum industries, but those industries only employ approximately 160 000 people. Now consider how many people work in the industries that will be hurt by these tariffs: The auto industry, construction, computing, etc… it’s pretty evident that this will be a net negative regarding employment!
- Free trade is not the reason US manufacturing is dying. This is the greatest lie of the Trump campaign; that those pesky Chinese have stolen millions of jobs and he’ll take them back. Here’s what’s actually happened: 85 % of the jobs that have been lost in manufacturing in recent decades have been lost to automation. That is robots and computers. Not free trade, just plain old machines. These jobs are gone for all eternity since technology is not going to start going backward. Sure, automation may also create some new jobs in other areas (like computing), but they won’t be your grandfather’s factory job with lifetime employment, a salary big enough to support a whole family and send your kids to college, and a nice pension once you got old. And let’s be honest: People voted for Trump because they dream of those days, and letting go of that dream is painful. Rather than admitting that it’s gone because the machines are here to stay, most people prefer to blame those awful Chinese for stealing their jobs.Even if Trump could take back all of the 15 % of jobs that have been lost to trade, these jobs would also soon be automated away as robots keep getting better. And what’s more, these jobs if they did come back, would not have the benefits and pay that they had when they were once shipped away, as there would be plenty of unemployed people in the Rust Belt who would compete for the jobs. Oh, and this time around you can forget about companies tolerating unions!
I don’t know if Trump will really go ahead with these tariffs, but if he does, this could very well turn out to be the worst decision he’s ever made.