#NoTariff is a good tariff. #NoTradeWar is easy to win. They are a can of worms.
The recent announcement by Trump that the United States will impose a 25% tariff on steel and 10% tariff on aluminum is a case of incredible economic ignorance, foolhardy hubris or both. Some of the greatest minds in economics, both Republican and Democrat have expressed the same sentiment, sometimes in even stronger terms. This week 107 Republicans sent a letter to the president urging him not to impose the tariffs. In the letter they state correctly that, “tariffs are taxes that make U.S. businesses less competitive and U.S consumers poorer.” I’m pleased that my representative, Drew Ferguson signed the letter.The reasons that tariffs do not work are easy to explain, so let me try:
1. Tariffs increase prices for American consumers making them poorer. Consider a company that operates here in my hometown of Newnan, Bonnell Aluminum. Bonnell is in the business of aluminum extrusion. Essentially, they manufacture anything that needs to be made out of aluminum and can be pushed through a die. Examples are storm windows and doors, store fronts, and car parts. Bonnell depends on huge amounts of aluminum billets (basically a large chunk of raw aluminum) as the main input to their process. A tariff of 10% will increase Bonnell’s costs significantly. You may ask, why would their costs go up? Can’t they just buy their aluminum from American providers? The simple answer is no they cannot. For years the companies that make the aluminum billets have shifted their production overseas. The remaining American billet manufacturers simply cannot meet the total demand in the U.S. market. So, Bonnell will have to buy billets from both American and overseas manufacturers, and their costs will increase by close to 10%. The imported aluminum will be 10% more expensive, and so will the American made billets. Why would an American billet manufacturer not raise their price by 9% to still be the cheapest and take more profit? In fact, they will raise their prices. In the end, the cost of extruded aluminum will increase the cost of cars, doors, windows and many other products – which of course increases cost to American consumers.
2. Tariffs cost Americans their jobs. Taking the Bonnell example as just one case, when costs increase demand always falls. When demand falls, production is always cut. When production is reduced, employees are always laid off or furloughed.
3. Tariffs can lead to a trade war. We see the first threats of this in today’s news. If Trump does impose his ill advised tariffs the European Union has threatened to respond with tariffs and a range of U.S. exports such as Harley Davidson, Bourbon, Levi’s and others. Trump has said if they do that he will put a tariff on imports of cars to the U.S. Would it end there? Of course not. The EU would certainly respond with tariffs on corn, soybeans, wheat and other agricultural products. Doing that would devastate the U.S. agricultural industry. Then Trump would respond, the EU will respond again and on and on. The result could be the same as what happened in the 1930’s after the Smoot-Hawley Tariff passed; the tariffs significantly contributed to a worldwide depression.
4. There are few easy or short wars of any kind. How many times in human history have leaders promised their people an easy or short war? Of the many wars that ensued, only very few were short, none were easy. Even in the short ones, there were significant casualties. In the 1930s after the passage of Smoot-Hawley, American exports felt by 61% damaging our own economy. The tariff war and subsequent depression continued for 10 years. All well respected economists believe the only thing that brought the world out of economic depression was World War II.
So, what should we do? I would encourage each one of us to contact our Senators and Representatives and ask them to contact the White House again and express their strong opposition to the tariffs. We should also contact the White House itself and express our deep concern regarding the harm that such tariffs can create. International trade is not a zero-sum game. The fact that the United States may have a trade deficit with a partner does not necessarily mean we’re being taken advantage of. There are many countries around the world but have a trade deficit with us, are we taking advantage of them? There certainly are problems of countries dumping commodities into the United States; and that must be addressed. Global tariffs are an illogical and ham-fisted way to address what is really a difficult and specific problem. A more nuanced and intelligent approach is needed. That of course would require hard work and serious thought; one has to wonder if our government is up to it.