President Donald Trump just opened the first salvo in a trade war by imposing tariffs (taxes) on steel (25%) and aluminum (10%). It won’t end well.
Trump has a long-standing hostility to free trade. He recently tweeted,
“The United States has an $800 billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more.”
His ideas on trade are, unfortunately for us, based on ignorance. He believes that when we buy things from folks in other countries that our economy suffers. That concept is pretty far from reality.
Here is what a “trade deficit” is: if you buy something from someone and that person doesn’t buy something from you, you have a trade deficit. Foreign trade is the same thing but between people in different countries. It is a meaningless number because both parties benefited from the transaction: the seller received your money and you received some goods. Win-win. If trade deficit accounting included the value of the goods you bought, it would balance out. Also, you should know that these dollars always come back to America as investments in our economy or to buy federal debt our politicians create by overspending. And, “countries” don’t have trade deficits: “countries” don’t buy and sell things, people (or companies) do.
The argument raised against this trade with foreign sellers is that it is “unfair” because “they” didn’t buy anything from “us”. Or, because “they” have cheap labor. Or, because “they” are dumping goods on the market at below what they cost to make. Or, because “they” are getting richer and “we” have to borrow money from them. Because of this “unfairness” American jobs are lost and we are in debt.
If only.
You only hear these arguments from inefficient manufacturers and their unions who are afraid of competition and the politicians who are awarded their votes. Almost every economist, left and right, understands that free trade is a boon to all nations who participate in it. Adam Smith in his Wealth of Nations (1776) refuted protectionism (then known as mercantilism) and demonstrated that free trade among nations creates greater wealth for all those involved. History has proven him right.
If free trade is so bad, then why did President Trump tweet a couple days before he announced the tariffs that, “Manufacturing growing at the fastest pace in two decades!”; and “Jobless claims at a 49 year low!” You can’t have it both ways.
The beauty of free trade is that we have manufacturers all over the world competing to satisfy our needs. It makes sense that some manufacturers can produce things more efficiently than we can here in America. Economists call this “comparative advantage.” These lower cost imports translate into lower cost products for us consumers. As a result, we have more money available to buy more goods, or to add to our savings, or to invest. One could argue that lower cost imports are helping the economy on its road to prosperity. Everyone benefits.
Well, except for American workers of inefficient steel companies. But foreign competition is only one factor in the long decline of American steel jobs. The main driver of lost manufacturing jobs, including steel, is technology. Investment in automation and computers and software has increased productivity and fewer workers are needed to make things. The result has been positive: American manufacturing output, adjusted for inflation, has increased 40% over the past 20 years. But technology and innovation are nothing new. The history of business is that old industries fail, new industries rise, and more jobs and opportunities are created. No one laments job losses from the decline of VHS, Beta, CDs, and 75-pound TV sets.
Protectionism is all about politics, not economics. Politicians like Trump only see the losses. They don’t see the benefits of trade, they only count the votes. There are 327 million Americans and only 140,000 steel workers. Who benefits from tariffs on steel imports and who suffers?
It is the rest of us who will suffer from protectionism. If imported steel costs 25% more as a result of Trump’s proposed tariff, then, all things being equal, consumer products will ultimately cost more. Because of that, consumers will have less money to spend on other goods, and the economy will slow down. Think of tariffs as a tax on us consumers.
Even worse, it is likely that steel producing countries facing these tariffs will impose retaliatory tariffs on U.S. exports to their country. Exports are a significant 12% of our GDP and account for almost 11 million U.S. jobs. These are the kinds of things that cause recessions. Even worse, Trump’s misguided policies could start a trade war which was one of the major causes of the Great Depression. Everybody loses.
We’ve been facing foreign competition since the late 1970s and our economy keeps growing. If China wants to restrict U.S. imports or subsidize its inefficient producers (dumping), it is Chinese consumers and taxpayers who will suffer, not us.
Yet President Trump seems oblivious to the risk. A trade war is one of the most dangerous things now facing our economy. The rise of economic nationalism and trade barriers are a threatening echo of the 1930s and we all know how that ended.
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