Editorial: "The God Emperor's" Ungodly Mistake
On March 9, 2017, president Donald Trump’s administration announced that the United States would be imposing steep tariffs of 25% and 10% on steel and aluminum imports. This comes after tariffs on solar panels and washing machines, a constant deadlock in the renegotiation of the North Atlantic Free Trade Agreement (NAFTA), and a yawning trade deficit of $56.6 billion in January (the highest in nine years). The tariff announcements have faced considerable backlash from Congressional Republicans and have left financial markets jittery across the world. They have also led to the resignation of Gary Cohn, Trump's chief economic advisor and the man behind the tax cuts, who sharply disagreed with the highly protectionist measure.
Setting aside all of the political and dogmatically ideological debates, there are strong, factual reasons to criticise the tariffs.
The tariffs on imported steel may promote the indigenous steel industry, but they will increase costs for many industries that rely on steel imports to meet their requirements, leading to a rise in layoffs. These industries include the likes of the auto industry and construction. The fact is such industries employ a greater number of people in the United States when compared to steel. The automotive industry, as estimated by the Bureau of Labour Statistics (BLS), employed 963, 500 people in February 2018 for vehicles and parts manufacturing alone. The construction sector employed an estimated 7,173,000 people in February 2018. In comparison, all of primary metals manufacturing, according to the BLS, only employed 382,600 people during the same period.
As a consequence, an increase in steel costs due to the tariffs will likely lead to greater job losses in the auto and construction sectors. This is especially likely for the automotive industry, which has already been under-performing in the past years. While construction has been growing well in 2017, it will be affected by higher costs too due to the use of steel beams being key to the sector. The steel industry, given its smaller size, will not be able to absorb job losses from such large industries. The tariffs will simply not be able to induce steel production to the extent required to possibly cushion the impact.
The 10% tariff on aluminum imports can be expected to cause such an effect as well. In fact, The Aluminum Association, an aluminium producing trade association, has conceded that not all the aluminium can be produced in the United States. Because of this, companies like Boeing (America's single largest exporter), which employ 140 thousand people, would face higher costs. The booming oil industry would also be seriously affected. According to Tudor, Holt & Co., an investment and merchant bank, the tariffs could lead to a 3 to 5% rise in pipeline construction costs, denting employment by the sector.
This strong likelihood of lost jobs makes the tariffs counterfactual to Mr. Trump's original agenda of being “the greatest jobs president ever.” In fact, The Trade Partnership, a trade and economic consultancy, predicts that these stringent measures could cause an estimated net loss of 146 thousand jobs. While the number of workers in the American metals industry could increase by 33,464 jobs due to the tariffs, other sectors could lose about 179,334 jobs. The increase in costs for these critical industries could trigger a harmful cost-push inflation and slower growth in the economy as a whole that is driven by lower consumption due to job losses. This may, in the worst case, go on to dwarf medium and long term growth whilst keeping inflation up.
The imposition of these tariffs has a high chance of igniting a trade war and is already seeing a strong backlash from the European Union. The EU is contemplating a challenge to the trade curbs in the WTO, which could lead to a “clash of the titans” dispute in the World Trade Organisation. The EU has also prepared a list of a 100 US products on which it would impose its own curbs in response to the tariffs. Such a dispute at the WTO combined with ‘tit-for-tat’ curbs on US goods by a market the size of the EU would have severe consequences for the American economy, especially when its trade deficit is at a nine-year-high.
Similarly, trade war or disputes between the United States and China—a country which has repeatedly been in Mr. Trump's crosshairs for its dominance in trade—may have potentially dire and long-lasting consequences. China has so far not taken major action against the tariffs on solar panels and washing machines but its patience shall definitely be tested by these new developments. Premier Xi Jinping is fast becoming Deng Xiaoping 2.0 and he presides over an economy with a trade surplus of $33. 74 billion in February. Mr. Jinping has little to lose relative to the United States if he decides to start a trade war and has the appetite for it, given the power he wields over China right now. While Beijing has adopted a cautious stance in regards the current tariff announcements, it might truly start an aggressive trade war against America with which it had a significant $20.96 billion trade surplus in February, only to bring about the latter's ruin.
The only good thing about these tariffs is that they obliquely compel Canada and Mexico, who will be hurt the most by these tariffs, to accede to US terms in the NAFTA talks. Mr. Trump plans to offer Canada and Mexico an extendable 30 day relief from these tariffs depending on the progress of NAFTA negotiations. However, there is no saying that Canada and Mexico will play ball. While Canada has not issued specific threats yet, prime minister Justin Trudeau has called the tariffs “absolutely unacceptable.” On the other hand, Mexico's economy minister has stated that if the curbs hit Mexico, then the country will be forced to respond with 'tit-for-tat’ measures. Both these reactions indicate that Canada and Mexico will not bear the brunt of Mr. Trump's aggravated protectionism quietly (they have already caused a deadlock in NAFTA talks). This may lead to a further gridlock in NAFTA that could adversely affect American farmers whom Mr. Trump had promised to protect in his election campaign.
Also, an exemption for only 30 days would incidentally hurt American industry. It may cause stockpiling of Canadian, Mexican aluminum and steel by American firms before curbs kick-in―leading to a rise in the international prices of these metals and an even weaker dollar due to rising imports.
Mr. Trump's demonstrably volatile economic policy, from the largely praiseworthy but debt-raising tax cuts to bloated budgets and irrational trade policy, is proving harmful to America. Yes, the trade deficit with China has expanded by 16.7% in January from the last month, and is at a three year high with Canada. But the tariffs on steel and aluminium seek to resolve these issues at great cost. They protect minor industries at the expense of much larger ones. And they could hit American trade and the economy hard due to the combined effect of a gridlocked NAFTA, rising production costs and retaliatory tariffs internationally. The Trump administration must either significantly water-down the decision to implement these tariffs or risk presiding over economic slowdown brought about by its own policy failure.