After many on and off signals, President Donald Trump pulled the trigger March 1 and announced he would slap long-term duties on steel (25 percent) and aluminum (10 percent) imports next week.
The last imposition of tariffs on steel by the United States was by the Bush administration in 2002. But the US withdrew this ill-fated measure in 2003 after the World Trade Organization authorized the largest penalty sanctions ever against a member state, and after the European Union threatened retaliation.
Back then, there was ample evidence of unintended consequences and perverse effects. Costs increased for consumers, and there were more jobs lost in those sectors suffering from higher steel prices than steel jobs created. After Trump’s announcement, the Dow Jones industrial average greeted the news with a drop of more than 1.5 percent. The stock marketthus voted with its feet against what investors perceive as a move that will have more disadvantages than benefits for the economy as a whole.
Uncertainty ahead
More broadly, Trump’s actions pave the way for much uncertainty ahead, since the long history of trade protectionism shows that “safeguard measures” rarely remain confined but are likely to have broader negative consequences.
If the president’s goal was to impact China, which produces over half the world’s steel and aluminum, this policy might not succeed. China is only the eleventh biggest exporter of steel to the United States. Canada, Brazil, South Korea, Mexico, and Russia are ahead of it. The European Union will also suffer from these tariffs; they will poison the global trade climate and may represent the first warning shot in a potential global trade war.
As always, what drives protectionism is not economics but politics. After more than a year in the White House, the president has yet to fulfill some of his key campaign promises. Last year the US trade deficit that he vowed to reduce was the largest in nearly a decade. The imbalance with China alone hit a record $375 billion.
With mid-term elections coming in November, the president undoubtedly felt it was time for him to look and talk tough on trade and China. The resulting job creation in a particular industry will be concentrated and visible, while jobs lost in other sectors will be diffuse and less glaring.
The danger, however, is that a move that will win the favor of voters in some states will cause concern among people in other parts of the country, since it may lead to trade retaliation targeted at politically sensitive US exports such as textiles from North Carolina or oranges from Florida.
Bottom line: Trump’s tariffs are likely to backfire eventually, and American consumers will pay the price.
