The Corner

Politics & Policy

Shooting Economic Growth In The Foot With Import Taxes

Commerce Secretary Wilbur Ross at a White house press conference, April 25, 2017. (Yuri Gripas/Reuters)

Economic growth matters a great deal. This is why President Trump promised that, under his leadership, growth will be great and its benefits will be felt by all, particularly middle class and lower-income Americans. But it is why it is so hard to understand how callous he and his Secretary of Commerce, Wilbur Ross, are to the negative consequences that their  25 percent import taxes on foreign steel will have on Americans and the economy.

For instance, at an event on Monday, the president said:

“I want to bring the steel industry back into our country,” Trump said at a meeting with US state governors at the White House. “If that takes tariffs, let them take tariffs. OK? Maybe it’ll cost a little bit more, but we’ll have jobs. Let it take tariffs.”

The president is right that his new tax will increase the prices of steel-dependent goods. What seems small to our president, however, maybe a big deal for those Americans who aren’t as well-off as he is.

As a very well-paid steel protectionist mogul explained this morning in the WSJ, “steel touches every American life”.  He  wrote:

“Steel touches every American life in some way every day. Infrastructure, building construction, appliances, vehicles, energy pipelines and more require steel.”

That’s right! That’s an argument against the import tax, not for it. All the steel-consuming industries in that list, as well as their consumers, will be negatively affected when “it’ll cost a little bit more”.  That’s about 5.4 million workers and many more millions consumers affected. How can the president be so dismissive of the negative effects it will have on them? What he calls a small cost increase means lower profits, lower pay raises, and fewer jobs in the industries so that one industry can get a temporary boost.

Deja vu! Remember the 2002 Bush steel tariffs? Those taxes protected the steel industry from a few, specific competitors and allowed them to jack up the price of domestic steel (without a positive impact on steel employment.) Those in steel-consuming industries, however, weren’t so lucky. According to one estimate, 200,000 people lost their jobs in downstream industries in following years. That’s more workers than in the entire steel industry.

According to the USITC, other reported consequences of the tariffs were difficulties obtaining steel in the quality and quantity desired, shifting to sourcing finished parts from overseas and relocating US steel-consuming facilities abroad. 

When Senator Lamar Alexander reminded the president of the negative  impact the 2002 import taxes had, Mr. Trump dismissed it as simply a product of the incompetence of Bush administration.

Here is is the exchange:

SENATOR ALEXANDER: I hope you will look carefully at what President George W. Bush did in 2002 when he imposed 30 percent steel tariffs — 30 percent increase — on tariffs from China, South Korea, a couple of other places. The effect was, one, that even though that was only 5 percent of the imported steel, it raised the price of almost all steel in the United States. Two, at the same time, auto-parts manufacturers who used the steel began to cut jobs and move outside of our country because they could buy the steel there, make the part, and ship the part back in without any tariff. And we found there were 10 times as many people in steel-using industries as there were in steel-producing industries. And so according to the auto manufacturers, they lost more jobs than exist in the steel industry. So that’s — so the questions would be, will it raise prices –

THE PRESIDENT: Lamar, it didn’t work for Bush, but nothing worked for Bush. (Laughter.)

In my opinion, the pain inflicted to steel-consuming industry workers is no cause for laughter, especially when it is the direct result of policies put in place by our own government, no matter who the president was at the time. It won’t be funny today either when the same policies, when implemented by Mr. Trump, result in the same job losses as we saw under Bush. Whatever the president believes, even he cannot suspend the the law of economics.

Oh and by the way, we won’t get more jobs in the steel industry as a result of the steel tariffs. Academic papers have proven this over and over. As Commerce’s own report on steel (figure 7, p. 36) shows, the decline of jobs in the steel industry predates the competition with China. Industry experts know that this is mostly due to innovation and industry consolidation.

Secretary Ross also feels it’s okay to offer a government handout to his friends in the steel industry since the tariffs will only hurt our whole nation a little . The pain, he says, will be negligible. Easy for him too say from the comfort of his federal government office.

Moreover, my colleague Christine McDaniel has an important piece over at The Mercatus Center’s Bridge debunking the relevance of the nationwide estimate used by the secretary to justify the president’s import tax. The bottom line is that, yes, economy-wide effects of these import taxes on goods in one particular industry are negative but understandably very small when measured against our giant economy and all industries put together. She writes:

A big shock to a small part of the economy will tend to have a small overall effect. Trade with China is three percent of US GDP, and steel and aluminum are just a fraction of that. So even a big tariff would be expected to have a small economy-wide impact.  …

This is not a criticism of the models, but rather a statement about how administration officials are using these models to justify their positions to impose new import taxes on manufacturing.

These models can, nonetheless, be extremely useful. McDaniel writes:

With a large scale representation of the US economy and its trading relationships, a great power of these models lies in their ability to trace the effects of a policy change industry by industry, capturing the input-output relationship across sectors. The model reports on estimated changes in employment, output, imports, exports, and other variables.

In other words, the models are powerful in showing the negative and large effects of the steel import taxes to downstream industries, in this case the steel consuming ones.

I understand the administration’s frustration with the negative consequences of the some of the competition from China and other countries. I do. But imposing steel tariffs that will destroy more jobs than exist in the industry they are trying to protect is totally counter-productive.

There are better methods to solve our trade disputes than shooting ourselves in the foot.



Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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