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On Thursday, President Donald Trump told U.S. executives that he was introducing new tariffs – 25% on steel and 10% on aluminum – to protect domestic industries. The next day, Trump, slamming “unfair trade” tweeted that “trade wars are good, and easy to win!” These are the words of an 18th-century mercantilist, as well as a pro-union Democrat.
The White House notes the tariffs are necessary to guarantee a sufficient supply of material crucial for national defense. But, as anyone who has covered Trump for the last several years knows, he wants to protect U.S. workers from cheap foreign steel, much of which is government subsidized. The U.S. imports four times as much steel as it exports from more than 100 countries.
The policy proposal, which is expected to be officially announced this week, has been tried before by Democratic and Republican administrations. Suffice to say, trade wars claim victims on both sides, but mostly by Americans. Import levies are primarily paid by U.S. consumers, the protected industry hardly prospers from tariffs, and other domestic sectors bear the brunt of this antiquated protectionism.
Thankfully, Trump is receiving some pushback from Republicans, conservative media, and free-market think tanks. Will he change course?
Why Don’t Presidents Learn?
In 2002, then-President George W. Bush instituted a tariff (ranging from 8% to 30%) on steel imports. After only 21 months, Bush repealed the tariff, stemming from European retaliation warnings, concerns about its legality, and complaints from U.S. business. The former president said the temporary tariffs were successful because it provided the industry with “breathing space” to compete on the international stage.
However, there were other far more important reasons why the tariffs were scrapped: price increases, economic declines, and employment reductions.
The U.S. International Trade Commission (ITC) reported in 2003 that losses produced by the tariffs surpassed the duty’s revenue by $30 million. There was also a supply shortage.
Moreover, the cost of domestic steel spiked in the range of 30% and 80%.
But did the U.S. succeed in bringing back jobs? Not in the slightest. According to a study sponsored by steel-buying firms, rising prices caused 200,000 job losses, particularly in the sectors of transportation equipment, metal manufacturing, and machinery. Other reports have pegged the figure at more conservative estimates like 43,000 jobs.
In 2009, then-President Barack Obama appeased a consternated middle America by implementing a 35% tariff on Chinese tires. He declared it a success in his 2012 State of the Union speech.
Yes, about 1,200 U.S. tire jobs were saved and production surged. Unfortunately for Americans, it wasn’t all sunshine and lollipops. Within just a couple of years, consumers paid an extra $1.1 billion in tires, nearly 4,000 retail jobs were lost, and other industries suffered as China retaliated. By the end of it all, the tire industry shed approximately 5,000 jobs by 2017.
The American Enterprise Institute (AEI) summed it up nicely: the Obama tariff “cost U.S. consumers $926,000 per job saved and led to the loss of three retail jobs per factory job saved.”
Despite the evidence, presidents keep repeating the same policies expecting different results. Whether it was the Smoot-Hawley Tariff Act signed by President Herbert Hoover or establishing a floor on the price of U.S. steel imports by President Jimmy Carter, the White House occupants personify the old Milton Friedman saying: “Governments never learn, only people do.”
Stop Shielding Industry from Competition
Whenever an industry whines about unfair trade, it usually means that they want to be afforded special privileges, generally in the form of subsidies or tariffs. As history has shown, the government almost always acquiesces to their demands.
Last year, for instance, Boeing made a fuss about Bombardier’s state-funded aid, and demanded the government intervene. Washington did, and it ruled in favor of Boeing, a billion-dollar corporation that is also heavily subsidized.
The U.S. steel industry doesn’t need any protection. In fact, it is doing quite well. Steel Dynamics posted $1.1 billion in operating income, Nucor shares have ballooned to $65, and US steel had earnings of $136 million in the fourth quarter of last year.
Contrary to protectionist opinion, a moribund domestic steel is a myth. U.S. steel needs a bailout as much as Silicon Valley or Wall Street does.
President Trump, like his predecessors, may have his heart in the right place: jobs. That said, Mercantilism is the wrong way to stimulate the economy and create lots of employment. He has already proven other methods work: the corporate tax cuts are encouraging business – large and small – to reinvest in the U.S. economy. Tariffs only burden consumers, play favorites, and harm the labor market.
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