Taxing American companies and consumers who use steel — which is what Trump’s steel tariffs do — is costly, economically illiterate, and on net a bad idea.
Amid all the arguments against protectionism, though, critics should acknowledge the complexity of the issue of free trade and domestic industry. That is, the economic arguments for free trade, while overall true, have a tendency to ignore human costs that don’t show up in a theoretical model, but do show up in real life.
The case for free trade is that it improves the welfare of all nations involved in the trading. This is true.
The classical argument for free trade doesn’t pretend that every individual ends up better off, though. It acknowledges that low-skilled workers in high-priced countries will see downward pressure on their pay (probably as they shift to service-sector jobs) and that this downward pressure may exceed the savings on goods and services. In other words, the aggregate effect of free trade will help the U.S., but some steelworkers could see a slight economic loss.
An eloquent expression of this view comes from my friends at the Mercatus Institute: “Free trade may reduce jobs in inefficient industries, but it frees up resources to create jobs in efficient industries, boosting overall wages and improving living standards.”
Things in real life turn out differently.
If you read any of the countless dispatches from the Pittsburgh region, trying to explain Trump, you could detect why. When factories close, there isn’t some easy transition to service sector jobs, in part because new jobs don’t just pop up where old factories shut down. Also, people aren’t always happy to —or able to — move to where the jobs are. And it’s not always obvious where the jobs will be for the foreseeable future.
This isn’t just the anecdotes of reporters in Fayette County. There’s economic data here, too. MIT economist David Autor has studied the impacts localities affected by cheaper foreign competition. He found not only downturns in wages and upticks in unemployment, but also upticks in Medicaid usage and even disability insurance. He also found a downturn in childbirth and marriage.
In other words, taking away factories leaves a deeper, more lasting wound on people and communities than some free-traders acknowledge.
On the surface, this could constitute an argument for protectionism. The problems are twofold: Tariffs won’t bring back the jobs lost, and making steel more expensive will actually cost manufacturing jobs in industries that use steel, such as auto workers.
All of this is to say that both sides have overly simplistic arguments in this debate.
