For the last three decades, Donald Trump has ranted that America is getting stiffed on trade. But as president, he’s done little to back up his “America First” slogan—until now.
On Thursday (Mar. 1), the U.S. president announced tariffs of 25% on imported steel and 10% on imported aluminum. The move is aimed at recouping the billions of dollars “lost” each year to other countries as the U.S. imports more than it exports from countries like China and Mexico. Coming on the heels of tariffs on washing machines and solar panels, the new trade barriers may be just the start of a bigger effort to overhaul global trade. Trump is already threatening to slap tariffs on European cars. More ominously still, the president is boasting that his tariffs will ignite a trade war:
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
Trump’s tariff is good news for U.S. steel and aluminum producers. A tax on imports makes the domestic equivalent relatively cheaper. But it’s bad news for anyone who consumes steel or aluminum, since it makes those metals more expensive. That’s just one of the ways that everyday Americans may lose out as a result of Trump’s proposed trade action, which poses a threat to the very people whose economic interests he claims to champion. And if he succeeds in launching his longed-for trade war, the entire global economy will suffer as a result.
Who pays the price?
While Trump’s announcement may hearten the country’s steel and aluminum producers, it’s bad news for the much bigger sector of the U.S. economy that buys those metals to use them in the goods they produce.
Take steel, for instance, which is used to make cars, cans, trains, and planes. The pillars of American infrastructure are made of steel, from office buildings to bridges; so are the cranes, excavators, and other machines that build those things. Steel equipment extracts the oil and gas needed to produce all this stuff, and forms the pipes through which they flow. U.S. steel-consuming manufacturers dwarf the U.S. steel industry, with more than 6.5 million workers. (The steel industry, meanwhile, employs about 140,000 workers, says Moody’s.)
Facing higher prices for foreign steel under the Trump tariffs, steel consumers have three options. They can absorb the cost and fire workers. They can absorb the cost and lower their profit margin. Or they can pass on the cost to customers.
Most people are worried about the last option. That said, a 25% increase in the price of foreign steel, even if fully transferred to the consumer, probably won’t make everyday canned goods all that more expensive. A can of Campbell’s, a popular American soup brand, has 2.6 cents worth of steel. If the cost of that input rises by 25%, that adds an extra six-tenths of one cent onto the price of soup. Who wouldn’t be willing to pay that?
That’s the logic Wilbur Ross, the U.S. secretary of commerce, is using to beseech the American people to please calm down. In a way, he’s right. The direct effect of the tax is most likely that prices will go up only marginally.
But Ross’ calculus ignores all the possible indirect effects of a tariff. For example, imagine American companies want to switch from using (now more expensive) foreign steel to U.S. steel, which is the point of a tariff in the first place. Can the U.S. steel industry handle the surge in demand? A trade sanction on steel from one of Trump’s predecessors offers some intriguing clues…