Trump's tariffs will do more harm than good, experts say
President Donald Trump on Thursday executed one of his most significant — and controversial — moves on trade policy since taking office, announcing plans to establish tariffs on imported steel and aluminum.
In a speech at the White House, Trump said the tariffs would protect U.S. manufacturers who have been "targeted for years and years" by unfair trade practices by other countries. He also linked the issue to national security, arguing that the U.S. military would benefit from stronger steel and aluminum sectors.
"The actions we're taking today are not a matter of choice, they're a matter of necessity," Trump said.
Trump said that the tariffs — 25 percent on steel imports and 10 percent on aluminum — will take effect in 15 days. But he said individual countries could negotiate with the U.S., leaving open the possibility that some might be exempted from the tariffs.
"We're going to show great flexibility," Trump said, adding, "we just want fairness. We want everything to be reciprocal."
Trump has long argued that the tariffs would grow the American economy and help reduce the country's trade deficit. He invited supporters of the tariffs to the White House ceremony, where several said they would benefit from the change.
But in recent days, as it became clear Trump would move forward with the tariffs, the proposal was met with near-universal opposition from economists, academics, business leaders and even some top officials in the Trump administration.
Earlier this week Gary Cohn, Trump's top economic adviser, announced that he would resign in the coming weeks; Cohn had argued strongly against the tariffs, though he didn't cite them as a factor in his decision to step down as head of the National Economic Council.
We spoke with trade experts, economists and business leaders to get their perspectives on the tariffs and how they might impact the U.S. economy.
Would President Trump's proposed tariffs on steel and aluminum imports help create more jobs in the United States, as he argues?
GARY CLYDE HUFBAUER, a trade expert at the Peterson Institute for International Economics, and former deputy assistant secretary for international trade and investment policy at the Department of Treasury:
Not at all. The tariffs will create jobs in the steel and aluminum industries — my generous guess is not more than 15,000 jobs — but they will destroy three or four times as many jobs sprinkled across the economy. The political optics, however, favor Trump's argument because the jobs created will be concentrated in specific plants and cities, lending them to "feel good" news reports, while the jobs destroyed will be widely dispersed, thus not exciting copy for "feel bad" news stories.
JEFFREY FRANKEL, an economist at the Harvard Kennedy School and former member of the Council of Economic Advisers under President Bill Clinton:
The import tariffs are likely to create a few jobs specifically in the U.S. firms that make steel and aluminum. The important point, however, is that such positive effects will be far outweighed by negative effects on other sectors. This is especially true of those manufacturing sectors that use steel and aluminum, such as the auto industry, heavy-equipment manufacturers, beer-can makers, and so on. The net effect is likely to be negative even if there is no loss of U.S. exports. But there will in addition almost certainly be a loss of exports, and therefore jobs, in other sectors.
TORI WHITING, a trade economist at The Heritage Foundation:
The short answer to this is no. A report released this week by Trade Partnership estimates that roughly 180,000 Americans would lose their jobs as a result of these tariffs. (Modest employment gains in steel and aluminum are predicted at 33,000 jobs, resulting in a net loss of jobs.) This does not include the impact of retaliatory tariffs by U.S. trading partners. History supports this. In 2002, the U.S. lost 200,000 jobs in one year in steel-using industries due to tariffs of up to 30 percent on steel.
PAUL CZACHOR, the CEO of American Keg Company, the only company that manufacturers steel beer kegs in the United States:
For our particular business it will not create more jobs. When we go to make a keg, our steel costs will be more expensive, but the low-cost import kegs are going to continue to use low-cost steel from China. U.S.-made kegs are already at a $15 premium now. That will rise to $25. It's all driven on the price of steel. Customers will not pay that premium and we'll lose business. That means we would have to cut jobs, and potentially might not be able to stay in business.
What impact would the tariffs have on U.S. consumers?
GARY CLYDE HUFBAUER: Consumers will pay, for sure, but since steel and aluminum are used at the beginning of the production chain for everything — from bridges, to autos, to buildings, to aircraft — very, very few consumers will be able to identify how their pockets and purses are being picked. That part of the price equation works to Trump's political advantage. It's the polar opposite of the political reaction to a gas tax increase.
TORI WHITING: A tariff is essentially a tax, and the purpose of that tax is to increase the price of an import. These taxes will make it more expensive for U.S. manufacturers to produce anything made from steel or aluminum, forcing them to increase prices. These price differences may be small for things like soup or soda cans, but price increases for larger products like a car will be noticeable. Even a 1 percent increase in the price of a car is $350.
PAUL CZACHOR: For certain industries I'm sure it would be minimal or insignificant. For other products, like a keg, it would be significant. It could raise the price of a keg by as much as $15 because the cost of the material is more than 75 percent of the cost of a keg.
How big of a ripple effect would this have on the global economy? Would other countries retaliate in ways that would have a significant impact on the American economy?
GARY CLYDE HUFBAUER: The direct ripple effect will be small in the U.S. economy and negligible in the global economy. Other countries, led by the European Union, will retaliate against iconic products produced in states with powerful Republican leaders. Again, the direct ripple effect will be small, but the hit to bourbon, peanut butter, orange juice and Harley-Davidson producers will be painful to those firms. The bigger ripple effect comes indirectly from the growing global perception that the United States is abandoning its historic post Second World War role as the steady anchor of the global economy.
JEFFREY FRANKEL: Yes, other countries are very likely to retaliate. They would be justified in doing so, since our national security excuse for these tariffs is flimsy in the extreme. (Very little of the steel or aluminum that we use is produced in China.) If one retaliatory round were the end of it, the negative effects might not be big enough to show up in global GDP — unless this is the shock that pricks a bubble in securities markets. The greater fear, however, is that this will not be the end of it, that it might even be the start of a steady unraveling of the global trading system that has contributed so much to global prosperity over the last 70 years.
TORI WHITING: The real area for uncertainty with these tariffs is in retaliation. Several trading partners, including the EU, have made it clear that they will retaliate. A tit-for-tat scenario between the U.S. and its closest trading partners is not in the interest of anyone. In the past, U.S. agriculture exports have been common targets for retaliation. Earlier this year, China announced its intent to consider targeting U.S. sorghum and soybean exports.
Trump has tweeted that winning trade wars is "easy." Is that really true?
JEFFREY FRANKEL: That blithe characterization is one of the most misguided economic pronouncements yet to come out of the White House. I have an awful suspicion that Trump's thoughts may run along the following lines: If we import more from a country than it imports from us, then the elimination of all trade costs them more exports than it costs us. But of course both countries lose big in a trade war. And if he thinks this is some sort of macho high-stakes game of "chicken," where he expects the other side to back down, he should at least give some indication of what specifically he wants other governments to do. He hasn't done that, so far as I am aware.
TORI WHITING: A trade war is not in the interest of anyone, especially American workers and American businesses. The result will be higher prices here in the U.S. and decreased competitiveness for domestic businesses. It would also create uncertainty, likely leading businesses to halt plans to invest, hire new workers, or increase wages and benefits for their workers. It is the role of the president to advance economic policies that will benefit all Americans, rather than just a handful of well-connected companies.
PAUL CZACHOR: I don't think that statement was appropriate. I do understand the difficulty of this, and I do appreciate the administration and President Trump trying to fix the steel and aluminium imports issue, [but] I don't think it's an easy task. I don't know how the administration is going to tackle that. That's one of my concerns.
The president seems to take a zero-sum approach to trade policy. Does that make sense in an increasingly global economy, where U.S. companies rely on an international supply chain to produce and export goods?
GARY CLYDE HUFBAUER: If President Trump learned anything about international economics at the University of Pennsylvania, the wisdom is long forgotten. His professors must be appalled. Trump's single-minded approach to trade policy is the ancient, and long since discarded, mercantilist arithmetic: trade surplus is wonderful, trade deficit is terrible. For every winner there must be a loser. This primitive mindset ignores comparative advantage, economies of scale, learning through competition, spreading of R&D costs, and much else.
JEFFREY FRANKEL: The international supply chain whereby we, like every country, depend on inputs of intermediate goods for our production, including for our exports, makes the costs of protectionism very immediate and tangible, perhaps more so than in the past. Again, barriers against imports of steel hurt the competitiveness of our auto industry. But the zero-sum approach to trade policy never did make sense. Adam Smith and David Ricardo showed this "mercantilist" fallacy 200 years ago, when they developed the classic argument for gains from trade. The principle was demonstrated the hard way, in 1930: the U.S. adopted the Smoot-Hawley tariff, other countries responded in kind, and global trade collapsed — which put the "great" in the Great Depression. Do we really have to repeat that experiment?
TORI WHITING: Trade is a win-win for all countries involved. Take North America for example. The North American Free Trade Agreement has allowed the region to become one of the most competitive areas for automotive manufacturing. Each of the three countries specializes in the part of the production process where it is most efficient and effective, sometimes resulting in products crossing the border half a dozen times before the final car is made. By utilizing diverse supply chains, we produce some of the best cars in the world.
PAUL CZACHOR: I don't know if his approach is going to work or not. It's more than one simple tariff. You've got to look at downstream products as well. As a country we need to do something. I just don't know how we solve this without creating serious conflicts for downstream manufacturers.