The White House has delayed its imposition of tariffs on steel and aluminum from our trading partners, holding out the hope of exemptions and compromise deals with a handful of steelmaking countries.
Judging by recent history, though, the compromises may be worse than the original plan.
“We are asking of everyone, quotas if not tariffs,” Commerce Secretary Wibur Ross said on Friday.
If this is what the administration asks of Brazil, Europe, and other trading partners, it will be bad news for the U.S.
South Korea, for instance, escapes the steel and aluminum tariffs as long as it doesn’t sell more than 2.7 million tons to Americans each year. That would be a 20 percent reduction from last year’s total from our third-largest supplier of steel.
Why is this a step in the wrong direction? Because although tariffs are a tax and are destructive, at least they do not involve economic central planning. Tariffs generate revenue and, in the best case, can be a trade-off for reducing other, more destructive and intrusive taxes. Raising tariffs on all imports while cutting the payroll tax could be an acceptable trade — a revenue-neutral way to allow workers to keep more of their money.
Quotas have the same primary effect as tariffs, which is to increase prices on U.S. consumers, without the secondary effect of raising revenue.
Quotas can also cause severe price increases and shortages. Steel tariffs depress supply by increasing the cost of foreign steel. Quotas set a hard cap on supply, so if demand for steel jumps or if something disrupts domestic steel production, it can force prices up more than tariffs do. We could end up with shortages and massive price increases if America needs more foreign steel than Ross thinks users will buy.
Smuggling and cronyism are another byproduct of quotas. Who is to decide which foreign steelmakers may sell how much steel to buyers in America? This tricky question invites special pleading. While tariffs create a small incentive to smuggle — think of cigarette smuggling to avoid tobacco taxes — quotas create a much greater incentive. It could be the only way to get the 2,700,001st ton of Korean steel into the U.S.
Boosting smuggling and cronyism is not good public policy.
While we’re cheered that the administration is willing to spend a month negotiating our way out of tariffs, there are many concessions better than quotas. We could ask other countries to reduce their regulatory barriers and their subsidies in exchange for an exemption.
Trade negotiations are good when they lead to multilateral disarmament. But swapping out a tariff for a quota is giving up one self-inflicted wound for another.
