Suppose you wished to conduct an experiment in perpetrating economic mischief. Your goal is to slow the economy, increase unemployment, retard wage growth and drive up inflation. Furthermore, you wish to damage long-standing international alliances, heighten the risk of global armed conflict, and encourage illegal immigration. What action might you take?
Slapping a 25 percent tariff on steel would be a good start.
This is more than just a thought experiment, as the president recently revealed exactly that intention. On Thursday, President Donald Trump announced that he planned to prescribe an import duty fee of 25 percent on foreign steel and 10 percent on aluminum imports. The President invoked both national security and the desire to punish China as justification for taxing a critical input to U.S. industrial production. Reaction was swift and overwhelmingly negative from economists, manufacturers, political leaders and trading partners alarmed at the prospect of discarding 250 years of hard-won experience.
Christopher A. HopkinsThe concept of comparative advantage is one of the least controversial tenets in economics. In his 1776 magnum opus, Adam Smith observed the mutual benefit to nations from producing those things for which they are best suited and buying the rest from cheaper sources. The global adoption of this premise under the Bretton Woods agreement in 1944 set the stage for the post-war economic boom that rendered the world richer, safer and more democratic. And yet, it seems every president is tempted by political exigencies to ignore the lessons of the past.
Here the historical record of failure is copious. Particularly pernicious are import duties on so-called intermediary goods, semi-finished products used to make other products. Inevitably, tariffs increase the cost of production, raise prices to consumers, dampen demand and reduce output and employment. Steel has often been the beneficiary (or victim) of such errors, but the most recent example is instructive.
President Bush imposed a 30 percent tariff on steel in 2002. By late 2003, he admitted the error and withdrew the levy, but not before the loss of an estimated 200,000 jobs in steel-consuming industries. That is more jobs lost than the entire steel industry employs. Other examples abound.
Of course, that’s just the half of it. It would be naïve to assume the victims of our retaliatory taxation would stand by idly. Most have already warned of retaliatory responses they might take, raising the specter of a trade war that could well lead to a global recession.
And bear in mind the peace dividend. Trade reinforces stability, as countries that do business are more reticent to shoot at each other. There is substantially less international violence today in a world interconnected by trade.
If the economic argument is insufficient, the practical should suffice. China, the purported target, supplies only 2 percent of our steel imports. Most of our foreign sources are allies, including Canada, Mexico and South Korea, who do not intend to take the affront lying down. Meanwhile, Defense Secretary Jim Mattis stated in a letter to the Commerce Department that defense consumes just 3 percent of U.S. domestic steel production and that supply shortages are not a significant risk to national security. In response to defense implications of unfair trade practices, Mattis advises against the kind of broad tariff announced by the president in favor of targeted actions against the Chinese specifically.
Advocating for protective tariffs is somewhat akin to denying the health hazards of smoking. The ephemeral gains in protected industries are overwhelmed by the damage to the larger economy, the cost to consumers, and the toll on our foreign alliances. This is a self-inflicted wound easily avoided.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.