[Image Source: AFP]
US President Donald Trump revealed plans in a meeting with US industry officials at the White House this week to impose a weighty tariff on imported steel and aluminium, come next week. Speaking of decades of ‘unfair’ treatment that the US steel and aluminium industries have suffered, President Trump vowed to take action to rebuild these industries and to protect their workers from being exploited. The President also tweeted on Thursday, stating that the United States wanted “free, fair and smart trade.”
In response to the news, US stock markets have dropped – the Dow Jones Industrial Average by 500 points, and the S&P 500 by 1.33%. The response has been harsh not only from the stock market, but from foreign officials and groups. Canada’s trade minister has spoken, saying any tariff on Canadian steel would be “unacceptable”. Canada, notably, is the largest foreign supplier of steel to the US. The German Steel Association has also commented that the plan violated World Trade Organisation rules.
Trump’s protectionist economic policies had been a cornerstone of the policies he ran on in 2016, but now as then, they remain economically reckless and irresponsible. Here are the reasons why:
1. The number of jobs protected by the steel tariffs is far outweighed by the number of jobs who have steel as an input.
Trump’s tariffs plan on steel and aluminium, and all of the protectionist policies he had ran on in general were based around one central motive – to protect domestic industries. However, this is extremely short sighted and dangerous, especially in the case of a material as widely necessary in industry as, for example, steel. If you tariff steel, you inherently create a higher market price for it. This means in every industry that requires steel, input costs rise, and firms then have two options. One would be to raise prices on the consumer, but this leads to less demand for their products, and a loss in revenue overall. The other would be to reduce costs elsewhere, and labour often being the highest input cost would mean workers get laid off.
The problem with tariffs is that they essentially tax one industry on behalf of another. This is not only inherent unfair and immoral, but in the case of steel especially, where the number of job in industries that require it as an input far outweigh the number of jobs in the actual industry, would see dramatically more damage across the economy than the small benefits it might provide.
2. The loss of jobs in industries such as steel in the US are due to technological advancement, not foreign trade.
It is true when looking at the numbers that American steelmaking jobs have fallen by three-quarters over the past half century. However, as noted by the American Economic Association in a major study, the majority of this had been because of technological advancements that allowed the productivity of each individual worker to increase fivefold. Seeing as the American steel industry has not grown much since then, nor has needed to, in terms of raw numbers, it would only make sense that the number of jobs has decreased since. The US continues to be in the top five in the world for steel production, and continues to consume domestically produced steel by a large majority.
3. Trade protectionism makes no sense from an economic point-of-view. There is no such thing as ‘fair’ and ‘smart’ free trade.
Since the campaign trail President Trump has decried the trade deficits that the United States runs with many of its trading partners. Despite there being some actual underlying economic issues to continued trade deficits, President Trump most likely despises them because they sound ‘bad’. Economically speaking, trade deficits or surpluses don’t mean too much. Countries like Japan had run numerous trade deficits in their rise to the top during the 1960s and 70s, whilst other countries in Africa run trade surpluses because there is no demand for foreign goods in the nation. To retaliate against a trade deficit with tariffs like boycotting the local pharmacy because when you buy medicine from them, they don’t buy into your services as a music teacher. Sure, you have ‘trade deficit’ with the pharmacy, but that doesn’t mean you would stop buying medicine from them. Unless you’re Trump – then you do.
If Trump continues with his protectionist policies, they will have far-reaching and devastating consequences for the American economy that will certainly materialise before 2020 – and if they do, they will sink his re-election chances faster than anything else.