[Noah Smith] Trump’s tariffs look like self-inflicted wounds

By Korea Herald
  • Published : Mar 13, 2018 - 17:31
  • Updated : Mar 13, 2018 - 17:31

"Trade wars," President Donald Trump recently declared on Twitter, “are good, and easy to win.” But it’s questionable whether the president’s proposed tariffs -- a tax of 25 percent on imported steel and 10 percent on imported aluminum -- will be a war or an act of friendly fire.

Tariffs are generally not a good way to promote domestic industry. They encourage American producers to hunker down behind the tax’s protective wall, focusing on the captive local market instead of figuring out how to prevail in the rough and tumble of global competition.

There’s also the danger that making metals more expensive will hurt a lot more US manufacturers than it helps. The construction industry would take the biggest hit.

Import taxes will tend to drive already exorbitant US construction costs even higher, hurting commercial development around the country.

It will also harm US exporters. The US makes a lot of internationally tradeable products that use steel -- aircraft, autos, appliances and industrial machinery. A lot of others use aluminum. Although the majority of what they use is produced locally -- the US steel industry supplied about 70 percent of the domestic market in 2017 -- a tax on imports will allow American metal producers to charge more to companies like Boeing, General Motors and Whirlpool. 

Higher steel and aluminum company profits will therefore come at the expense of these other American manufacturers -- exporters like Caterpillar and Harley-Davidson are already warning that the tariff would put them at a competitive disadvantage in world markets.

So Trump’s ham-fisted attempts to protect one American industry seem likely to deal a blow to many others. This is the exact opposite of the increased international manufacturing prowess that Trump has promised.

Defenders of the tariffs argue that steel and aluminum are important for national defense, and so need to be protected even at the cost of less martial industries. But military shipbuilders will be hurt by higher metals prices, as will makers of tanks, planes, guns and other crucial defense equipment.

Nor will the tariffs bring back good jobs at steel and aluminum factories. Since 1990, production of metals in the US has held roughly constant, but the number of people employed in the industry has fallen steadily.

The reason is technology. Productivity has improved, even as demand has stayed more or less constant. Mathematically, that means fewer jobs for steel and aluminum workers. Tariffs won’t change that equation. If anything, by hurting downstream industries like car and equipment manufacturers, the new import taxes will probably kill more factory jobs than they save.

So Trump’s metals tariffs look likely to be a self-inflicted wound for the US -- even if they don’t spark retaliation from trading partners, and even if they don’t weaken American alliances.

If Trump wants to help the steel and aluminum industries, there are better ways to do it. Instead of letting US metal makers charge higher prices to other American industries, the government could focus on helping to raise exports. The reason domestic steel production hasn’t grown isn’t because of cheap imports; it’s the fact that the US market hasn’t grown.

The US is a mature economy with a lot of existing buildings, infrastructure and vehicles, meaning that its consumption of metal can be expected to grow only slowly. Countries in Asia and Africa, however, need lots of new steel to fuel their economic development. The US, which makes higher-quality steel than countries like China, could potentially be supplying much of those countries’ needs. Currently, US steel companies command only 2 percent of world exports, compared with 24 percent by China. 

There are things the government could do to improve that situation, including export promotion, export loans and assistance for small producers looking to break into world markets. Selling more steel and aluminum abroad is a much better bet than trying to capture a bigger slice of a stagnating pie back home.

So far, though, Trump has shown more interest in trade war for its own sake than in actually helping US companies compete. Tariffs might make Trump and his diehard followers feel better, but they’ll hurt more American pocketbooks than they benefit.

By Noah Smith

Noah Smith is a Bloomberg View columnist. -- Ed.