A useful guide to reality, even if not to politics, is that trade sanctions and trade tariffs and protections have the same economic effect – it’s the consumers who lose out. More specifically, it’s the consumers supposedly protected by tariffs who carry the costs.
We can look at this in detail with the effects of Trump’s sanctions against Oleg Deripaska, the Russian oligarch. His company, Rusal, produces some 6 percent of the world’s aluminum. The sanctions mean, roughly enough, that no American can do a deal with Deripaska or any of his companies. In practice, this means that no one who deals with Americans can, nor anyone who might want to sell them something made of aluminum in the future.
One effect of this is obvious: Rusal’s aluminum is just piling up at the factory with no buyers. The company is beginning to crack at the seams, Deripaska is a great deal poorer than he used to be, and apparently mission of the sanctions is accomplished.
Yet economics is about looking beyond the obvious to what is unseen.
I have some up close and personal experience with the Russian aluminum industry, and a nicer bunch of thugs and crooks would be difficult to find. I’ll not shed tears over what’s happening to them.
But what is that next part of the story, that bit we’re not obviously seeing? If we take 6 percent of the world’s aluminum production out of the system that’s going to change the price a bit. As it has done, the global price has risen 20 percent. Given the size of the market that’s about $28 billion — $28 billion more that consumers have to pay to producers that is, a net loss from you or me.
Note that aluminum is “fungible, ” so it doesn’t really matter which ingot of it you use. So if Russian material isn’t available then we can use U.S., or Chinese, or European, or whatever. But it also means that the world price moves in lockstep. Hitting Rusal has raised the price of aluminum in the U.S. by 20 percent, and it’s also lowered the price in Russia. If you’re building something in Russia, for Russians, you don’t care one bit about U.S. sanctions even as most of the world industry does. So aluminum for Russians in Russia is now cheaper, even as it’s more expensive for Americans in America.
Maybe Oleg deserved all that was coming to him, maybe not – international statecraft isn’t quite my thing. But who pays for the sanctions is obvious: American consumers and those connected to them. Anyone without contact with the U.S. economy benefits just as equally as the loss to American consumers.
The important underlying point here is that these economic effects are exactly the same as any trade tariff or other trade restriction. The costs apply to those who are supposedly protected by the actions, the benefits flow to those outside them. The costs to Americans of these sanctions are exactly the same as the costs of a tariff upon imported aluminum which then raises U.S. prices by 20 percent. At a rough guess that (6 million tons a year of usage in the U.S., $2,400 a to price) is a cost to American citizens of just under $3 billion.
All that trade “protection” does to us, the people being protected, is raise our cost of living. The benefits flow to everyone else in the world who is not “protected.” OK, sure, maybe Deripaska deserves all that’s coming to him, and we’ll just have to suck up those costs. But what the heck’s the justification for import tariffs which equally stick us with the bill?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
