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LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
MARCH 7, 2018
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We will return to a discussion of the Economy in the March 21 issue of IntelDigest. However, Donald Trump has diverted the conversation to Trade and Tariffs, so we’ll delve into that subject over the next two weeks.
As background, you can read our November 16, 2016 issue … see the IntelDigest Archive … on the history of Protectionism and the development of Free Trade.
Trump Tariffs
In Trump’s mind, “protecting our workers” requires imposition of substantial U.S. Tariffs on steel and aluminum imports. This comes six weeks after he announced Tariffs on imported washing machines and solar panels.
Many members of Trump’s own party view Tariffs as just another form of taxation on the American people. Conservatives generally tend to be anti-protectionist with respect to trade policy, but even noted conservative influencers from organizations such as The Heritage Foundation are complaining that they are frozen out of White House discussions on this matter.
Now, one of the leaders of the White House faction which opposes imposition of Tariffs has announced his resignation as the Director of the National Economic Council. Gary Cohn … formerly an investment banker and president of Goldman Sachs … has been a known advocate for Free Trade.
His tenure at the White House was marked by the major pro-business overhaul of the tax code and significant reductions of rules and regulations on financial corporations. However, he is viewed as a “globalist” by many in the Trump Administration, putting him at odds with those, including Trump himself, who see themselves as “economic nationalists.”
Steel and Aluminum
Trump’s plan is to impose tariffs on steel and aluminum imports … 25% on steel and 10% on aluminum … to be applied “broadly” and “without quotas” to all U.S. trading partners. We can only hope that this threat is merely a negotiating tactic designed to elicit more favorable terms from our trading partners
However, if the Administration goes through with the plan, there are a few major problems:
First, imposition of additional taxes which favor one industry at the expense of many others is precisely the kind of special-interest-politics which Candidate Trump had decried when he promised to “drain the swamp” in Washington.
Second, the perceived benefit to a relatively small number of U.S. workers in these industries would result in significant costs to millions of other Americans.
Higher steel and aluminum prices would increase profits in U.S. steel and aluminum producers, but hundreds of other American companies, employing millions of other American workers, would have to bear higher costs for these materials.
The other companies could take the decrease in earnings, then dismiss lots of their workers. Or, they could pass the higher costs on to consumers. All of us would face higher costs on a variety of products, from cars and trucks to beer and other canned goods.
The point is that, while the steel and aluminum industries may capture a short-term, government-induced win, users and consumers of these materials will suffer the loss. Republican Senator Orrin Hatch characterized the Tariffs as little more than “a tax hike the American people don’t need and can’t afford.”
Third, this plan is not likely to meet its objectives … it will not result in a significant number of new American jobs in these sectors.
The steel and aluminum industries reached their peak in the U.S. in the mid-1950s, and have been contracting steadily over more than 60 years. For example, steel industry jobs are down by 80% over that period of time. Data from the American Iron and Steel Institute and the Aluminum Association indicate that these industries employ 300,000 Americans today, which is less than 0.1% of the U.S. population.
With or without Tariffs, that is unlikely to change any time soon. Companies which have outsourced jobs would have little incentive to bring those jobs back. And, it would take decades to try to rebuild the capacity lost over 60 years.
Note that U.S. steel production is down by less than 50% over that 60-year period. While many jobs were lost through outsourcing and the growth of these industries in other countries, much of the reduction in American jobs is attributable to higher productivity here in the U.S.A.
In an op-ed entitled, “Tariffs are Taxes,” three Trump-supporters and well-known free market advocates … Larry Kudlow, Arthur Laffer, and Stephen Moore … wrote:
“… even if tariffs save every one of the 140,000 or so steel jobs in America, it puts at risk 5 million manufacturing jobs and related jobs in industries that use steel. These producers now have to compete in hyper-competitive international markets using steel that is 20 percent above the world price and aluminum that is 7 to 10 percent above the price paid by our foreign rivals.”
Steel Countermeasures
The greatest danger in imposing Tariffs is the risk that our trading partners would retaliate against American industry.
The European Union (EU) is preparing to impose its own tariffs on several U.S. products if the Trump Administration follows through on its steel Tariffs. Bloomberg reports that the EU plan would target 2.8 Billion Euros ($3.5 Billion) of American goods, applying a 25% “tit-for-tat” levy on a range of consumer, agricultural, and steel products imported from the U.S.
The list of U.S. products includes:
shirts, jeans, cosmetics, other consumer goods, motorbikes, and pleasure boats worth approximately 1 Billion Euros
orange juice, bourbon whiskey, corn and other agricultural products totaling 951 Million Euros
steel and other industrial products valued at 854 Million Euros
The EU has discussed expanding the list of targeted American goods should Trump also follow through on his pledge to impose a 10% duty on foreign aluminum.
We will continue this discussion of Trade Wars next week in IntelDigest.