Tariffs threaten economic system
NEW YORK — President Donald Trump has set off what could end up becoming a full-blown trade war. As we go down this path, it is worth keeping something firmly in view: Tariffs don’t work. I’m not spouting free-market theory; I’m simply making a practical observation. There have been many efforts in recent decades to help industries in decline in America. I can think of no case where tariffs have worked to reverse that decline, except temporarily.
Take the most recent example before Trump: tariffs on tires put in place by President Obama. In 2009, after complaints from American companies about cheap Chinese imports, the Obama administration slapped a 35% tariff on Chinese tires. As many as 1,200 jobs were saved in the tire industry, according to the Peterson Institute.
But the institute also estimates that consumers paid about $1.1 billion in higher prices, which caused 3,700 jobs to be lost in the retail sector. The cost per tire job saved was almost $1 million. In addition, China retaliated with tariffs on American chicken producers, which Peterson says led to $1 billion in lost sales. As for the longterm effect? In 2008, there were 60,000 Americans working in the tire industry. By 2017, there were 55,000.
Robert Lighthizer, Trump’s top trade negotiator, learned his tactics during the 1980s, back when Americans were worried that Japan was ravaging the U.S. economy with cheap imports. As Ronald Reagan’s deputy trade chief, Lighthizer employed a variety of trade barriers to cut imports of Japanese goods like cars and steel. Doug Irwin recently noted in Foreign Affairs that two comprehensive studies by the International Trade Commission and the Congressional Budget Office concluded that these sorts of measures were ineffective. The CBO’s conclusion was simple: “Trade restraints have failed to achieve their primary objective of increasing the international competitiveness of the relevant industries.”
Consider Trump’s steel and aluminum tariffs. The pro-tariff Alliance for American Manufacturing claims that 12,700 jobs have been saved or added. But the Peterson Institute calculates that higher steel prices cost American companies about $11.5 billion a year, or about $1 million per steel job saved. U.S. aluminum production has risen slightly but is still well below 2015 levels.
The U.S. occupies a central place in global
supply chains, with many industries using it as a hub to produce goods and services. If it becomes a high-tariff fortress, it will lose that pivotal place in the international economy.
The nonpartisan National Bureau of Economic Research released a paper in March observing that Trump has ushered in the largest return to protectionism since the Smoot-Hawley tariffs of the 1930s and the brief Richard Nixon shock of 1971. The scholars calculated that Trump’s tariffs last year cost American consumers and firms a staggering $68.8 billion a year.
The U.S. now has the highest tariffs among the G-7, the group of the world’s leading industrialized countries. Over time, other nations will surely become more protectionist as well. And history suggests that, once imposed, tariffs are hard to repeal since domestic lobbies that benefit will advocate fiercely for their retention. In 1964, retaliating for a European tax on American chickens, the U.S. placed a 25% tariff on light trucks. The chicken tax was repealed long ago, but the truck tariff remains in place.
It’s true that China has been something of a trade cheat, though more often than not it has been clever in using and manipulating the rules to its benefit. But to put things in perspective, according to a 2015 Credit Suisse tally, the country that imposed the most non-tariff protectionist measures since 1990 was the U.S., with three times as many as China. And that was before Trump. More importantly, although Trump wants China to abide by World Trade Organization rules, many of his measures are either a violation of those rules or a flagrant abuse of them, such as the use of the “national security exemption” to slow down imports from “threatening” countries, such as Canada and Germany.
Many of Trump’s demands on China have nothing to do with opening up markets. They are shopping lists presented to Beijing for goods mostly produced in states that the president wants to win in 2020. Think soybeans grown in the Midwest. It’s less a trade strategy than a re-election strategy. In fact, it actually moves China in the direction of greater statism since the only way Beijing can fulfill Trump’s wish list is to have the government or state-owned enterprises buy the goods.
Trump’s trade strategy might have started out well-intentioned, but it has turned into a highly politicized and out-of-control wrecking ball that could end up destroying a system that has brought peace and prosperity to the world for 75 years.