Tariff Wars: Where Strong Economies Go to Die

Okay, we have scant credentials as trade experts, although in 1958 I recall trading Frank Robinson (Cincinnati Reds) and Orlando Cepeda (San Francisco Giants) for Roberto Clemente (Pittsburgh Pirates) and Sandy Koufax (L.A. Dodgers). When the trade was completed I had the baseball cards I wanted and a pretty good wad of bubble gum to boot. Today, with President Trump’s trade (tariff) pronouncements, the stakes are, unfortunately, much higher. His tariffs are almost certain to hurt our economy.

Why is he doing this?  Well, it was a campaign promise and President Trump keeps his campaign promises. Whether his promises were sensible or not, well, that’s another matter. That “pay raise” nearly everyone got as a result of the tax Act, won’t mean much a year from now if everyone is paying more for almost everything. And that’s a real danger because President Trump’s trade war won’t be as easy to win as he thinks.

There is no question that China has been dumping cheaper steel into the US market.  However, invoking across-the-board tariffs on all imported raw steel (and aluminum) from all foreign producers is a ham-handed way to address that issue. Actually, China is far from the largest exporter of steel into our country.  Canada is. And we export a ton of goods into Canada. A trade war with Canada is, well, dumb.

American manufacturers who are consumers of steel and aluminum will face cost increases commensurate with the higher cost of domestically produced steel and aluminum or the foreign tariff-penalized steel or aluminum they import. Those higher costs will, of course, be passed onto American consumers. It also means that all foreign-manufactured finished goods containing steel (or aluminum) will come into the United States at a cheaper price to American consumers than finished goods produced in our country with America’s higher priced steel and aluminum. That can’t be good for American producers of finished goods.  Whether an American company produces airplanes (with lots of finished parts that contain steel or aluminum), or toasters, their costs are going to go up substantially if they buy finished parts from American producers. That’s because the tariff only will apply to the raw material and not the finished parts in finished goods that are imported.

Our foreign trading partners who have not been guilty of dumping cheap steel and aluminum in the United States, have some pretty muscular alternatives with which to let us know they aren’t happy with the trade war Trump seems to want to declare. Airbus, Boeing’s major foreign competitor, must be chomping at the bit to show our friends abroad how to send a nastygram to the United States.

Smoot-Hawley is probably the most depressing couple we know. They penned the disastrous Smoot-Hawley Act of 1930 that virtually all economists credit for further plunging the United States into the deepest depression in our history. Now a lot has changed since 1930, and we don’t think the easy-to-win trade war Trump seems anxious to start will be a replay of the Smoot-Hawley days.  There are, however, lessons to be learned. Countries who are hurt by these tariffs, but who have played by the rules will retaliate. There will be layoffs in our exporting industries as these countries send us a message by imposing tariffs of their own. That’s exactly what President Bush 43 learned when he imposed a three-year tariff on steel in 2002 and quickly lifted the tariff when faced with the predictable retaliation that our European trading partners were about to impose.

Economics, often referred to as the dark science, isn’t always very dark and it isn’t always very complicated. When President Trump imposes his 25% tariff on imported steel and his 10% tariff on imported aluminum, the price of everything domestically produced that uses steel and aluminum will increase. Think cars, toasters, washing machines, clothes dryers and most all other appliances and an enormous array of other goods will go up.  Count on it.

And here is something else to think about. The cost of borrowing is pretty low in the United States. That is, in good measure, because our foreign trading partners— yes, like China, buy a lot of our debt. Ironically, they get the funds to turn around and buy American debt from the dollars they receive through the trading surplus (to them) and the deficit (to us). We Americans hate deficits. In international trade, however, deficits aren’t always the bugaboo unread politicians make them out to be.