Economy & Business

How Trump’s Steel Tariffs Could Harm National Security

Steel factory in Jiaxing, China, in 2013. (William Hong/Reuters)
Other sensitive industries will see their costs rise.

Fog afflicts all wars, those over trade in particular. And no fog is thicker than that created by the age-old national-security rationale for trade restrictions, applied most recently in defense of the tariffs imposed by President Trump on March 8 (and then delayed for Canada and Mexico until June 1) on steel imports, under section 232 of the Trade Expansion Act of 1962.

Per the president’s proclamation,

the Secretary [of Commerce] found . . . that steel articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States . . . [by] “shrinking [our] ability to meet national security production requirements in a national emergency.” Because of these risks and the risk that the United States may be unable to “meet [steel] demands for national defense and critical industries in a national emergency,” and taking into account the close relation of the economic welfare of the Nation to our national security . . . the present quantities and circumstances of steel articles imports threaten to impair the national security.

If “national security” is the justification for protectionism in the steel market, then we must consider all the national-security effects that tariffs would have, recognizing the applicability of that rationale to a very large number of sectors.

Consider energy, for example, a sector of the economy that involves not only producing energy products, but also transporting crude oil to refineries, refined products to users, natural gas to power plants, and on and on. Those industrial activities are clearly important to our national security, and higher costs could result in a reduced ability to “meet [petroleum] demands for national defense and critical industries in a national emergency.”

The cost of steel represents roughly 10 to 20 percent of the overall cost of constructing and operating an oil field. Pipelines often are made of specialty steels not currently produced in the U.S., and replacing that foreign output domestically will raise prices. The cost of pipeline construction is roughly $5 million per mile, depending on local conditions, of which materials are 15–20 percent. The proposed steel tariffs would increase overall construction costs by 3–5 percent; for an average 280-mile project, that cost increase would be about $75 million. Senator Lisa Murkowski (R., Alaska) estimates that the tariffs would increase the cost of the proposed Alaska natural-gas pipeline by $500 million.

Increased costs would lead to other unintended consequences as well, such as petroleum moving by rail or truck instead of by pipeline, resulting in increased accidents and deaths. (Moving a given amount of petroleum by truck results in about 35 times as many adverse incidents as moving it by pipelines.) The tariffs will yield increased costs and unintended adverse effects across most of the U.S. economy, in every sector that uses steel.

At a more general level, the presidential proclamation endorses a tariff of 24 percent on steel imports, designed to increase domestic capacity utilization to 80 percent, a figure not observed in the U.S. steel industry since 2008. (In 2017 the figure was 74 percent, an increase from 71 percent the previous year.) The administration seems not to have noticed that increasing domestic utilization actually conflicts with the national-security rationale, because in a national emergency we would rely on surge capacity — i.e., unused capacity.

One might respond that what is needed is greater steel-production capacity overall, but that would require an artificial increase in prices through tariffs or quotas that would be more or less permanent. Such new investment would result in higher average production costs over the long term, in particular for national-security needs, hardly the first example of a self-defeating policy.

In addition, it is not clear why our trading partners’ excess capacity might be insecure, given that Canada, Brazil, and Mexico are three of the top four steel exporters to the U.S. (South Korea is No. 3). The feasibility of a blockade on U.S. steel imports from those nations is far from obvious, which is one stated reason that Canada and Mexico were exempted temporarily.

If excess capacity is needed for future national-security emergencies, then a subsidy for maintaining such excess capacity, as a formal part of the defense budget, would be a much more efficient way to create it. And if national defense is a government product accruing to the benefit of all, then it should be financed through the tax system rather than through trade protectionism, the costs of which are borne disproportionately by consumers of steel. Was Mr. Trump elected to continue the age-old Beltway practice of finding ways to hide the costs of government by shifting them out of the budget and into prices in the private sector?

Further, the ability of the U.S. to bear the costs of national security obviously depends on the size of the economy, and even the administration has not tried to pretend that the steel tariffs will make the economy larger. Most sectors in the U.S. economy use steel, and the tariffs will create a large and artificial cost for the economy by hiking the cost of an important input.

Just as during the Obama years, rent-seeking (and rent-defending) will reemerge as an important route toward greater profitability.

Policy munificence for some means pain for others, and the economic reality is that the pain from tariffs always exceeds the protection, substantially. This reality is borne out by analyses of the effects of the steel tariffs and quotas imposed in 2002, not to mention other studies of trade protectionism over more than 30 years. The benefits for the steel producers will prove small and fleeting, while the adverse effects on users of steel will be large.

Moreover, the foreign steel capacity idled by U.S. tariffs will not disappear. That production will be sold to others, presumably at reduced prices, harming the competitiveness of other U.S. export sectors in those markets. Are none of those industries important in a national-security context?

The administration also seems not to have noticed the likely exchange-rate effects of the steel tariffs: The dollar will strengthen, and the competitiveness of U.S. exports generally will be reduced.

The announcement that foreign automobiles might be subjected to similar tariffs does not bode well for the economy or for the Trump economic record. Because there is no obvious limit on the national-security rationale for protectionism, this policy will engender substantial uncertainty in the economy. It will also conflict with the goals of Trump’s deregulatory efforts and of the recent tax reform. Just as during the Obama years, rent-seeking (and rent-defending) will reemerge as an important route toward greater profitability, with effects for the economy in the aggregate far from salutary.

Let us hope that rationality prevails in the context of trade policies as they evolve in the Trump administration.

Benjamin Zycher — Benjamin Zycher is a resident scholar at the American Enterprise Institute.

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