Trump made an informal announcement Thursday, declaring that the United States would soon be setting a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. The tariffs would not target a specific country, just the two specific goods.
The United States is the world’s largest importer of steel, importing roughly 27 million metric tons of steel in 2017 towards usage in a variety of industries, including construction, transportation, and energy. Alternatively, the United States imports close to 7 million metric tons of aluminum, which represents about 90 percent of America’s aluminum consumption, in order to produce everything from weaponry to beer cans.
The idea behind such protectionist policies as tariffs and quotas is that they will increase demand for domestic products, thus increasing the number of jobs and the associated pay within a given industry. But this argument is fallacious and ignores a simple fact: if an industry is already operating at near-capacity, a sudden increase in demand in a given product will do nothing more than create a supply shock, sending prices higher as the market tries to ration the available goods.
The argument gets even dicier if you start to consider a tariff or quota imposed on not just a particular good, but a particular country as well.
Consider former President Barack Obama’s tire fiasco of 2011. Over the course of three years, Chinese tires were subjected to a series of gradually decreasing tariffs to curb their impact on the U.S.’s domestic tire market. The result was abysmal. According to reports from the Peterson Institute for International Economics, the move rescued, at most, 1,200 jobs within the domestic tire industry and cost the retail sector almost 4,000 jobs. Furthermore, China then slapped retaliatory anti-dumping duties on chicken parts exported from the United States, squashing nearly $1 billion in sales in that industry. How can that be?
Because protectionist policies rarely produce the long-term boost their proponents promise.
In the case of Obama’s flirtation with protectionism, the tariff on Chinese tires did little more than drive the more frugal U.S. consumers into the arms of alternative low-cost tire manufacturers, such as those from Thailand, South Korea, Indonesia, and Mexico. American tire manufacturers were never quite in direct competition with Chinese manufacturers because American manufacturers were not in the business of selling low-end tires to begin with.
Still, demand increased slightly within the American-made tire market, as those who opted not to buy the second-cheapest rendition, bought American instead. The overall cost to American consumers of this switch was still in the ballpark of $1 billion, according to the same report from the Peterson Institute for International Economics. And as Americans spent more within the tire industry, the market for other retail goods took a significant hit of close to $1 billion, resulting in an estimated loss of close to 4,000 jobs.
The objective of boosting a given industry’s domestic market is a noble one, but the actual outcome associated with tariffs is rarely what its proponents argue it will be.
Lastly, by engaging in a trade war, as Trump has suggested, we open ourselves to be hurt in other industries. Perhaps the steel industry will preserve a few thousand jobs in the short-term, but as we saw with recent attempts at protectionism, other industries may take a disproportionate hit for the sake of another industry. Are we in the business of determining which jobs are worthier than others?
Erielle Davidson (@politicalelle) is an economic research assistant at the Hoover Institution in Stanford, Calif.
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