Free and Fair, Tariffs and Trade

Last week, President Trump announced his intention to slap tariffs on imported steel and aluminum.

President Trump suggested 25% tariffs on steel with aluminum imports being subject to a 10% tax. This was the first salvo in what President Trump suggests is an easy-to-win trade war, started in the hopes of achieving “free and fair” trade and protecting our metals industry from international competition.

The problem with President Trump’s statements on international trade are multi-faceted and illustrate an ignorance of basic economics. For one, no one wins trade wars. When restricting trade, the ‘winner’ is whoever is hurt less – and make no mistake, plenty of people are hurt. In the long term, almost everyone is worse off as a result of trade restrictions. Additionally, the term “free and fair trade” is redundant, because free trade is, by definition, fair and Trump’s definition of fair trade isn’t free – it’s tariffed.

When President Trump said he wanted free and fair trade he was missing something; free trade already is fair trade because no one is coerced intro transactions. They enter voluntarily into transactions or they choose not to enter into those transactions – either way, it is up to the two parties to decide how to structure a deal, or if a deal can even be reached. When limitations or other criteria are placed on trade, such as tariffs, they effectively insert a third party into the negotiations. A third party who dictates many of the terms (such as price, and effectively who you can trade with) and refuses to negotiate. This scenario is hardly what most would consider fair and what’s worse it creates worse outcomes for all parties involved.

If President Trump wanted to breed discord with the announcement of the tariffs, both within his inner circle and among our trade partners, as well as further panicking the market he has accomplished that in spades. Since his announcement the market has been rudderless, with volatility spiking. His top economic advisor, Gary Cohn, has stepped down over his disagreement with the tariff plan, and the European Union has proposed retaliatory tariffs on U.S. imports, also equal to 25%. Many economists have come out publicly to condemn the proposed tariff plan with no one of note, on either side of the aisle, in support of the tax.

The two most often cited reasons in favor of tariffs, which are nothing more than taxes on imported goods, are that it will help protect jobs and will strengthen a particular industry, at least domestically. There is some truth to this statement. Historically, domestic industries that have been benefited by taxes on imports from their competitors have saved jobs and have become more profitable. But not without consequences. Consequences that are not only significant but that are borne by you and I, the consumer. After all, regardless of who the tax is levied on, ultimately that money has to come from somewhere, and often it comes in the form of more expensive goods, paid for by the end user.

Tariffs, and taxes more generally, shouldn’t be a partisan issue. Whether right or left, republican or democrat, everyone should want free trade and everyone should desire to keep more of what they earn. To that end, tariffs accomplish neither goal. They have not worked under republican administrations, they have not worked under democrat administrations and they will not work now.

During the Obama administration tariffs were placed on imported tires from China. The tariff was 35% and was the result of American companies lobbying for protectionism because they could not compete with China’s tire industry. This tax eventually phased out in 2012, but by then significant damage was already done.

Did the tariff do what was intended? It did in fact protect jobs, 1,200 jobs in the tire industry were saved as a result of the curtailing of free trade, which was great news for those 1,200 employees. What was not intended was that because of this decreased competition the cost of tires went up for you and I, the consumer. In total, Americans paid over $1.1 billion more for tires than they otherwise would have, which results in an average cost per job saved of $926,000. That’s an expensive lesson to learn. Are all those 1,200 jobs saved worth nearly a million dollars each? Given these statistics, from the non-partisan U.S. Bureau of Labor Statistics, I think you’d be hard pressed to answer yes.

Moreover, its been estimated that while jobs were saved in the tire industry, the higher costs forced upon consumers of tires, including businesses resulted in job losses that amounted to three times the amount of jobs saved by the tariffs. Any way you slice it that’s a bad deal for Americans on the whole.

By definition, tariffs are designed to give certain companies (domestic) an advantage over other companies (foreign). Whenever you advantage one firm over another you limit competition. When competition is limited you end up with fewer choices, higher prices and decreased innovation over time.

Another argument often made in favor of tariffs is that it is good for the industry being protected and that is absolutely true, but its not good for the rest of economy. This was perfectly illustrated in the immediate aftermath of the announcement of the tariffs, where steel and aluminum stocks got a nice bump while other industries, from cars to cans, saw their stock prices drop with the expectation that their costs would increase significantly

In short, tariffs benefit one domestic industry against its international competition. These benefits include jobs saved and higher profits for the companies being protected. What is often not considered are the downstream effects. Costs are higher for all consumers because these prices (especially when they are raw materials used in other industries) are reflected in other parts of the economy where jobs will be lost that will likely offset, if not outright dwarf, the number of jobs saved.

In addition to higher costs and fewer options, domestic manufacturers will have fewer incentives to improve and therefore innovation will suffer as well, ironically making the very industry being protected less competitive globally over time. This is highlighted well with U.S. auto manufacturers before more technologically advanced Japanese competition started taking market share.

Tariffs are bad for the economy. They only sound good when little effort is put into understanding them. We’ve seen this time and again, and history will repeat itself with the looming steel and aluminum tariffs. Some jobs will be saved, many more will be lost and all we’ll have to show for it is higher prices, inferior products and a lower standard of living.