On March 1, President Donald Trump was widely expected to announce a new round of trade restrictions on steel and aluminum. But that morning word leaked out that the announcement had been postponed—maybe permanently canceled. Then we heard the president had called industry leaders to the White House for a “listening session” with Secretary of Commerce Wilbur Ross. By midday, the president was telling reporters invited into that roomful of business executives that he’d decided to introduce a 25 percent tariff on all steel imports and a 10 percent tariff on aluminum imports. “We’ll be signing it next week,” he promised. “And you’ll have protection for a long time.”
The president has a way of misstating his own administration’s intentions, so take these numbers as approximations, but it seemed clear late last week that steep tariffs were on the way.
Though it was a logistical debacle (it often is with this White House), the reason for this chaos is not unique to the Trump era: Top administration officials disagree strongly over trade issues and were vying hard to persuade the president. We’re told that Secretary of State Rex Tillerson, Secretary of Defense James Mattis, and chief economic adviser Gary Cohn were sharply opposed to the tariffs on the impeccable grounds that they sour international relationships even as they harm our economy in both the short- and long-term. Ross and trade representative Robert Lighthizer were for protections. Their support is unsurprising: The former used to own steel mills and the latter represented them as an attorney and lobbyist.
The arguments for tariffs are almost exclusively political rather than economic. Tariffs are popular with certain demographics and with the specific companies and industries they protect, but they harm the wider economy. When the George W. Bush administration imposed tariffs on imported steel in 2002, American steelmakers took the opportunity of diminished competition to raise prices. U.S. manufacturers who bought steel for their products had to adjust to higher prices, and as a result 50,000 workers lost their jobs, according to a study by the economists Joseph Francois and Laura Baughman. Overall, when combined with other economic headwinds, the 2002 tariffs cost the American economy 200,000 jobs and $4 billion in lost wages in just one year. And the Bush tariffs, which were repealed after just 21 months, were far smaller and more targeted duties than the ones announced by Trump.
Proponents of steel tariffs like to point out that conservative’s conservative Ronald Reagan imposed similar tariffs. But numerous studies have concluded that those restrictions cost the American economy as much as $2.3 million for every job in the domestic steel industry they protected.
Tariffs also tend to sabotage our international objectives. Earlier this year when the Trump administration announced new levies on washing machines, the United States in essence picked a fight with a nation—South Korea—whose friendship we need to manage the problem of North Korea.
The hard truth is that protecting domestic industries from foreign competition only encourages those industries to relax, which quickly turns into lethargy. While the protected companies settle into an easier mode of profitmaking, their foreign competitors improve, and soon enough Americans are stuck with higher prices and lower quality.
All this brings to mind the late Ken Iverson, who remade the nearly bankrupt Nucor Steel into one of the great steelmakers of the world. Iverson stridently opposed protective tariffs, believing they harmed the companies and industries they’re meant to help. In a 1986 interview, he was asked why temporary steel protections couldn’t be used by the industry to regroup and modernize. “We’ve had this ‘temporary’ relief for a long time,” Iverson answered.
Iverson was a brave and capable man. We wish there were more men of his kind advising the president.
But protective tariffs are not only a disaster for each specific industry, they are also harmful to the wider economy. That is the point beautifully and simply made in Henry Hazlitt’s classic Economics in One Lesson (1946). Hazlitt asked his readers to consider what would happen if Congress imposed a $5 duty on British sweaters. “The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business,” Hazlitt wrote. Sounds like a fine idea, right? By protecting the American sweater companies from cutthroat competition, the government fosters a domestic industry or even enables the creation of a new industry that didn’t already exist. Hazlitt goes on:
But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.
In economic terms, a sweater is no different from a ton of aluminum or plate steel. All are created and sold for money. Assuming the Trump administration imposes the duties announced by the president, America’s steel companies will relax—and others will suffer the consequences.
