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The Emperor’s New Tariffs: Small, Ugly and Stupid
Trump is throwing a tantrum, but the damage will be real
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Many people expected Donald Trump to begin a global trade war soon after taking office. Many people in business, however, believed that after all the huffing and puffing he wouldn’t actually impose much in the way of tariffs.
What we actually have so far is Schrödinger’s trade war: Is it alive? Is it dead? Yes.
It’s hard to believe that just last week Trump seemed dead set on imposing 25 percent tariffs on Canada and Mexico, with similar tariffs likely soon against other trading partners. Then, suddenly, he put the whole thing on ice for 30 days. Trump tried to spin it as a victory, claiming falsely that he had won big concessions from our neighbors. But if you looked at what they actually agreed to — basically nothing they weren’t doing already — it was an ignominious retreat.
So is it over? No. This week Trump announced that he was imposing tariffs after all, but only on steel and aluminum.
Before we declare that the trade war is on again, however, there are three things you need to know. First, these tariffs are a much smaller deal than what Trump seemed about to do last week. Second, while they’re small, they’re ugly. Third, as an economic policy they are really, really stupid.
About the size of this week’s tariffs: Steel and aluminum are obviously crucial materials for the modern economy, and a major cost for some industries. But they’re a relatively small share of total imports:
Source: Bureau of Economic Analysis
By the way, I’ve included “manufactures of metals” because there’s some uncertainty about whether the tariffs will hit things like I-beams as well as just the metals themselves. Even if they do, however, a 25 percent tariff on metals will have an inflationary impact much, much smaller than a 25 percent tariff on everything.
Why do I say that these tariffs are ugly? Because this is a policy that gratuitously punishes allies who have done nothing wrong. Most steel and iron comes from nations that are or were American allies; imports of aluminum come almost entirely from Canada:
Source: Census via Reuters
Why does Canada produce so much aluminum? Because aluminum smelting uses a lot of electricity, and Canada has cheap hydropower. When a close ally produces what, you might say, Mother Nature herself intended that nation to do, how can that be a reason for punitive tariffs?
And of course we have a free trade agreement with Canada, which Trump is simply ignoring, claiming that we’re “subsidizing” our neighbor because they sell more to us than we sell to them. More on why that’s nonsense in a minute. But meanwhile, this is a clear signal to everyone that America can’t be trusted.
Finally, the stupid part: Steel and aluminum aren’t consumer goods. They’re “intermediate inputs,” used in the production of other things, notably cars and aircraft. Imposing taxes that raise the prices of these goods might encourage more U.S. production of metals (although that didn’t happen to any large degree the last time Trump imposed tariffs), but it will raise costs throughout the rest of U.S. manufacturing, making it less competitive and reducing employment. Even if we ignore indirect effects via interest rates, the dollar and so on, these tariffs are almost certain to reduce, not increase, manufacturing employment.
So what’s this all about? I don’t think we should waste time trying to come up with some rational explanation for Trump’s actions.
What I see, instead, is a temper tantrum