The Trump administration has said it soon may impose broad-based tariffs and quotas on steel and aluminum imports, relying on a section of 1962 trade law that gives presidents such discretion in the name of national security.
The use of that law would be ironic. Not only are steel imports not a threat to national security, the imposition of high tariffs on steel and aluminum would make it more expensive for the federal government to acquire military ships, tanks and armored vehicles, thus harming national security.
An increase in tariffs and quotas would be the worst thing for an economy that, other than a few jittery investors at the moment, is as strong as it has been in years.
The benefits of free trade, along with its close cousin, competition, are as close to settled science as any economic concept can be. Economies do not exist in isolation. When goods are traded freely, consumers get to choose winners. Competitive pressures improve quality and drive down prices.
The resulting economic activity increases jobs. The best of U.S. manufacturers benefit from their ability to export to other nations, just as U.S. consumers benefit from cheap imports.
Tariffs serve only to increase the price of imported products, thus protecting a select few manufacturers from the leveling effects of competition. As a result, products manufactured in the U.S. also become more expensive and less innovative. U.S. consumers suffer because they have fewer choices and must pay more for products. The government, not the market, picks the winners.
Typically, U.S. trading partners will raise their own tariffs on American exports in response to higher U.S. tariffs. That makes it harder for U.S. manufacturers to sell products abroad.
The net result of all this is less economic activity, which ultimately results in fewer jobs.
The start of the Great Depression offers a textbook case of why dramatic tariff increases are bad. As a reaction to the economic downturn, U.S. lawmakers decided to protect American workers from foreign competition by passing the Smoot-Hawley Tariff Act of 1930. The consensus among historians and economists is that this made the Depression worse, helping to prolong the downturn into a decade-long struggle with unemployment
Before that act became law, 1,028 economists signed a letter to President Herbert Hoover urging him to veto it, arguing the nation “cannot increase employment by restricting trade.”
The only difference between then and now is that today the U.S. economy is on solid footing. The unemployment rate, as of January, was 4.1 percent. Despite recent corrections, the stock market remains at near record high levels. It’s unclear what problem the president is attempting to fix.
The increases the president is contemplating are alarming. A report from Commerce Secretary Wilbur Ross offers several options, including a 24 percent tariff on all steel imports from all countries, or a whopping 53 percent tariff on imports from a select few countries. Another option would be to impose a quota on steel products, keeping them to no more than 63 percent of a nation’s exports to the U.S. last year.17 comments on this story
The populist argument for these tariffs is that countries such as China are unfairly flooding the market with cheap, subsidized steel. The market reality is that Chinese steel likely would find its way to U.S. markets regardless, through third-party countries. The economic reality is that subsidized Chinese steel comes at an enormous cost to the Chinese economy, which ultimately weakens that country.
The Trump administration has other avenues for battling unfair trade practice, including appeals to the World Trade Organization.
Imposing tariffs and quotas would be the worst of all options, ultimately hurting Americans and costing jobs.