Trump is slapping stiff tariffs (i.e., taxes) on steel and aluminum imports. He says it’s to protect our “vital” steel and aluminum industries from foreign competition. Which he calls “unfair” and “disgraceful” (two of his favorite words) because foreigners sell the stuff cheaper than us. So unfair!
1. It protects American aluminum and steel companies — a very small part of our economy (we no longer make much steel) — at the expense of businesses that use aluminum and steel — a very big part. Their aluminum and steel supplies get costlier. Making them less competitive against foreign manufacturers. Studies have shown that in such cases, we lose many times more jobs, in all those affected industries, than are “protected” by the tariffs.
2. It raises prices for consumers, on all items made with aluminum or steel. That reduces consumers’ living standard and purchasing power, causing a reduction in other things they might otherwise have bought, which in turn costs jobs in all those industries.
3. The higher consumer prices raise inflation, and thus interest rates, which also flow through to consumers and make U.S. businesses further less competitive. And given the huge national debt, every bump in interest rates costs taxpayers a bundle, and worsens our already dire fiscal situation, weakening America.
4. Higher interest rates also push up the Dollar’s exchange rate vis-a-vis other countries’ currencies, making all our exports more expensive to them, thus reducing our exports and related jobs.
Understanding all this doesn’t take a business genius (stable or otherwise). No economist disputes it.
Trump, and the aluminum and steel guys, say fair trade is fine, but China isn’t playing fair, it’s cheating. How? By making too much steel and selling it too cheap! Adam Smith said in 1776 that if another country wants to sell us something too cheap, we should take advantage of the bargain. Rather than trying to compete with them on steel, we should instead concentrate on other industries where we have what economists call our own comparative advantage. Every country doing that makes the world richer.
Adam Smith
Flouting this logic doesn’t “protect” our economy, but harms it. Tariffs always hurt the nation imposing them. That will be true of those retaliating against us with tariffs of their own. They’ll hurt themselves too. But they’ll probably do it anyway, to teach us a lesson, and also because they (and their voters) are not always so smart either.
Protectionism is politically seductive because some people get big benefits, while the vastly greater number who get screwed don’t realize it.
Trump’s view of trade centers upon the old-time mercantilist fallacy that imports exceeding exports is bad (which Adam Smith labelled “absurd”). Trump says China “rapes” us by selling us more than it buys from us. If that’s true, I get raped by a lot of coin dealers. But in fact we make such purchases because it’s advantageous. Walmart buys things from China (and I buy coins) to make money. Consumers buy them to save money. Trade is not a zero-sum game, it’s win-win. A no-brainer.
Wall Street gave its verdict on Trump’s tariffs, the Dow promptly plunging 420 points.
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