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Tariffs Won’t Make America Great Again

by | Mar 31, 2018 | Economic Affairs News

Since entering the Oval Office more than a year ago, President Donald Trump and his administration have instituted and proposed a series of tariffs on a diverse panoply of imports. Citing the America First agenda, the White House wants to impose a tax on everything from Canadian softwood lumber to Chinese aluminum. By adopting 19th-century mercantilist policies, the president believes he can protect American jobs, shrink the trade deficit, and level the playing field for U.S. companies.

The chief occupant at 1600 Pennsylvania Avenue may have the right intentions, like many of his Democratic and Republican predecessors, but these endeavors often result in unintended consequences. There might be short-term gains, but there is long-term pain that leaves many industries reeling and broken.

Price hikes, job losses, and lost revenues are only some of the adverse effects of employing protectionist measures. Despite history showing that incorporating tariffs into trade policy always backfires, governments continue to resort to this failed maneuver.

Why?

Political expediency may be one reason. It is a lot easier promising the electorate that their administration can bring back jobs rather than conceding that certain jobs are not coming back. This would be political suicide; honesty is never advised to be the best policy when seeking public office, only mendacity and vague remarks are recommended.

Tariffs Claim American Victims

Democrat or Republican, presidents and representatives routinely intervene in the marketplace with inept policy prescriptions.

In 2002, then-President George W. Bush announced a tariff on steel imports. He repealed it after just 21 months, experiencing pressure from domestic businesses and international governments. When President Bush scrapped the import levy, he called it successful because it extended steel with “breathing space” to compete against the likes of China and the European Union (EU) on the international stage.

Was it a successful endeavor? Hardly.

The cost of American steel surged as much as 80% because there wasn’t foreign competition. These rising prices produced two unfortunate trends: losses created by the tariffs topped $30 million, and as many as 200,000 jobs were shed. Employment reductions were found in steel-consuming sectors, like machinery, transportation equipment, and metal manufacturing.

A similar policy was enacted in 2009. This time then-President Barack Obama targeted Chinese tire imports with a 35% tax. It was initially a success, as roughly 1,200 U.S. tire jobs were saved. The positive results quickly reversed in just a couple of years: 4,000 retail jobs were eliminated, consumers paid an extra $1.1 billion in tires, and other industries endured declining revenues. Because the Chinese government retaliated with its own tariffs on U.S. products like poultry, other sectors of the economy witnessed job cuts. But tire manufacturing must still be booming today, right? Total tire industry employment is down 5,000 from the time President Obama first introduced the tariff.

Now that the current administration is slapping levies on steel and aluminum imports, Beijing and the EU are ready to retaliate.

One part of the U.S. economy that is being threatened is agriculture. China imports a large percentage of soybeans from the U.S., while the EU imports a substantial portion of oranges from the U.S. Both sectors are vulnerable right now, especially Florida’s orange market, which has been in a depression for several years now, thanks to citrus diseases, falling sales, and weather events.

Steel may be shielded from foreign competition, but now U.S. agriculture faces potential hardships. Sonny Perdue, Secretary of Agriculture, is beginning to sound the alarm, warning that agriculture exports could be disrupted.

Other tariffs under the 45th president, like those on washing machines, are leading to a 15% jump in the price-tag for Made in the USA washing machines.

Throughout modern U.S. history, you continually see negative results stemming from tariffs. From Presidents Herbert Hoover to Richard Nixon to Jimmy Carter, leaders think they can solve a particular industry’s woes by conjuring up inadequate remedies from centuries ago.

As legendary economist Milton Friedman repeatedly quipped, “The government solution to a problem is usually as bad as the problem.”

Productivity Killed Steel Jobs

Unions and politicians tend to find a scapegoat for any downturn. Whenever they demand special privileges for certain industries, they usually shriek about leveling the playing field, encouraging fair trade. In the case of steel, according to men like Peter Navarro, Canada and China are to blame for the U.S. not having as many steel jobs as it did 50 years ago, in which case steel should be afforded certain privileges that others do not enjoy.

Whether it’s a case of oblivescence or good old-fashioned fibbing, these two parties are mistaken.

In 2018, steel employment is about a quarter of what it was in 1953. This isn’t the fault of a foreign entity but rather American ingenuity and productivity.

For years, it took at least ten man-hours to generate one ton of steel. Under present conditions, only 90 man-minutes are required – in other mini-mills, 30 man-minutes is all that is needed. Ostensibly, steel mills are more efficient than they have ever been because of technological advancements.

Most steel companies have installed electric arc furnaces in their factories. The process of turning scrap metal into steel without having to create steel from scratch does not require too much time and effort – or manpower. This is why we have witnessed remarkable production levels worldwide.

The type of steel production we have become accustomed to ceases to exist, and it will never be resuscitated. It doesn’t matter how many quotas, trade restrictions, and tariffs are applied by the state. Governments need to realize this before they do even more harm to Americans.

Want to help steel? Slash taxes, slash regulations, slash red tape. So far, President Trump has excelled in this arena.

Do Trade Deficits Matter?

A common grievance from both sides of the aisle is the trade deficit. It has been expatiated since the 1980s that the trade deficit is a serious issue and it needs to be solved right away.

At first glance, the figure is astonishing: the U.S. trade deficit totals close to $600 billion. The nation imported $2.895 trillion of goods and services and exported $2.329 trillion.

But should we even care about the trade deficit? Many people may complain about it because of the word “deficit.” We mistakenly equate it to things like the budget deficit, but the trade deficit has very little bearing on the lives of everyday Americans.

We all have trade deficits. You have one with your supermarket, your doctor, your tailor. New York may have one with Florida, while Florida may have one with North Dakota. And no one is declaring a crisis.

There is a misconception that the $600 billion is being stolen by countries that are “ripping us off.” Once again, this is where politicians are misleading the public, attempting to create national angst.

Right now, there is a trade deficit of $380 billion with China and $68 billion with Japan. These countries aren’t merely holding U.S. dollars and looking at the dead presidents. They are putting the Federal Reserve Notes to work by buying or investing in U.S. assets, like businesses, stocks or Treasury notes. (Politicians gripe about foreigners holding U.S. debt, but guess who created all that debt in the first place.) The dollars are constantly returning home to the Land of the Free.

For example, last year, Japanese multinational conglomerate SoftBank Group announced that it would be investing $50 billion in the U.S. economy over the next five years. This is an instance of having the foreign capital account surplus create an abundance of opportunities for Americans.

Would trade surpluses – exporting more than importing – make everyone happy? Well, during the Great Depression of the 1930s, the U.S. only had a current account deficit for 18 months during the entire time. For much of the ‘30s, the U.S. exports totaled $26 billion, while imports reached $21 billion. By the logic of the protectionists, the national economy should have been booming. We all know what happened – well, except for the Keynesians like Paul Krugman who blame the free market for the significant contraction.

Another legendary economist, Walter Williams, suggests the current trade situation should be a source of pride for all Americans:

“The fact that foreigners are willing to exchange massive amounts of goods in exchange for slips of paper in the forms of currency, stocks and bonds should be a source of pride. It means America, with its wealth, rule of law and the sanctity of contracts, inspires foreigners to hold large amounts of their wealth in U.S. obligations. Their willingness to do so means something else: Trade increases competition. Ultimately it’s competition, many producers competing for his dollar, that truly protects the consumer. What protects producers, at the expense of consumers, are restrictions on competition. The quest to restrict competition is what lies at the heart of the trade deficit demagoguery. When’s the last time you heard a consumer complaining about his buying more from a Chinese or Japanese producer than that producer buys from him?”

Final Thoughts

There is an old Groucho Marx joke: “Politics is the art of trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedy.” This can easily be applied to the current political climate and global trade.

Despite claims of income inequality, Americans are wealthier. Despite statements that the U.S. isn’t manufacturing anything more, the U.S. still produces a diverse array of goods and services. Despite the Federal Reserve destroying 90% of the dollar’s value, the purchasing power has expanded thanks to foreign relief, whether it is another government subsidizing their exports or buying U.S. debt.

The American employer and employee alike haven’t been decimated by China or Canada, Japan or Jamaica. He or she has been hurt by maladroit politicians and leftist policies like higher taxes, economic interventions, inflation, bureaucracy, and bigger government. Tariffs won’t Make America Great Again; they will only hinder any gains President Trump has made since going to Washington.

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