With his announcement Thursday that he is imposing steel and aluminum tariffs not only against China but also on Mexico and Europe, President Trump is taking trade policy in exactly the wrong direction.
The president’s awful misunderstanding about trade is reflected at least partly in the fact that the Dow Jones industrial average, about which Trump so likes to brag, is down by nearly 500 points this week and by more than 2,000 points from its high this year. It’s no coincidence that this sharp slump covers the period since Trump’s first mention of steel tariffs.
Markets hate what Trump is doing because it can only hurt the economy. For each steelmaking job Trump appears to save by making the metal artificially expensive, he will kill several jobs in other industries that use steel and must now pay more for it.
Those industries, such as automaking and construction, will suffer. Their exports will be especially hard hit. They will have less money with which to invest and grow, and hire new workers. Industries that export will lose business abroad, as foreign governments retaliate with tariffs of their own, and America’s trade deficit will be more liable to grow than shrink. So the president’s policies are self-defeating as well as being economically damaging.
Trump is not the first world leader to prioritize steelmaking to the detriment of much larger and more crucial domestic industries. It’s a common mistake. Steel sounds like a solid industry, in the same superficial way that brick-and-mortar houses seem a safe investment.
But neither is the case. Of all the entities out there, government is the worst equipped to make decisions about which industries should be elevated at the expense of others. Trump is thus making a classic error of central planning, and following in footsteps that should really make him reconsider.
As we have mentioned previously, the arrogance and abject ignorance of Mao Zedong was reflected during his Great Leap Forward. The conceit of this crackpot calamity was that China could be modernized if, among other things, as many people as possible stopped doing useful things such as growing food, and instead made steel. They often did so by melting down their pots and pans in their backyards. Mao’s mandate to overtake British steel production came at the expense of needed activity, such as grain production. The Great Helmsman did not care that this government-imposed industrial emphasis was neither practical nor responsive to market needs, nor that peasants lacked the means to make steel of sufficient quality to be useful. The famine that resulted from this gross misallocation of labor and resources, combined with other bad policies such as the collectivization of agriculture, was one of the worst catastrophes in human history as measured by the number of needless deaths.
Obviously, this is an extreme analogy, and much worse than anything Trump’s mistake here is going to cause. But why follow this terrible and embarrassing example, and become “Mao Tse Trump?” Nothing good will come of a president elevating one very small and ailing industry over several larger and more viable ones.
Trump’s insistence on tariffs may not be a total political loser. It might keep some of the small, marginal set of workers who powered his 2016 election victory onsides.
But the policy is putting his entire presidency in danger by raising the specter of an economic downturn in a midterm election year. If Trump wants to avoid former President Barack Obama’s fate as an inconsequential lame-duck president facing a hostile Congress after just two years in office, he must reverse course and find a better deal.
