Again with the tariffs on imported steel?
President Trump is expected soon to announce whether he will impose 20 percent tariffs on imported steel. If so, this would be the second unforced error in trade policy by an inexperienced Administration, following the President’s January withdrawal from the Trans Pacific Partnership. But for American workers, this one may inflict more pain.
The United States is the world’s largest importer of steel. This is because it makes little economic sense to divert scarce resources to producing a product with little value added that we can so easily and cheaply obtain elsewhere. Better that we focus on high-value goods and services that create more wealth for Americans, and buy our steel, coffee, socks and toys from others. This is the principle of comparative advantage, and few concepts in economic theory are as well settled and relatively undisputed.
Still, politicians will pander to their electoral base, even if they really know better. On the subject of protectionism as with few others, history clearly demonstrates the folly of the president’s threatened course.
Article I of the U.S. Constitution effectively prohibits one state from erecting trade barriers against another. Tennessee cannot impose a tariff on Georgia peaches. Why is that? The Founders understood that free and uninhibited trade was essential to the expansion of income, wealth and security of each state and thereby of the entire Union. They may not have read about “comparative advantage” in economic textbooks, but they clearly and rightly grasped the concept.
One of President Reagan’s greatest mistakes was his imposition of “voluntary export restrictions” on Japanese cars in 1981. The action temporarily reduced foreign competition and allowed the woefully inefficient American automakers to delay necessary improvements in productivity and quality while gouging U.S. car buyers. After competition inevitably resumed, two of Detroit’s three major producers ultimately collapsed into taxpayer-funded bailouts.
With regard to steel, most post-war presidents have taken a hapless turn at standing athwart the inexorable advance of economic forces. Against his better judgment, George W. Bush took his own shot at sheltering U.S. steelmakers with a 30 percent levy on foreign imports in 2002. Guess what happened. While the 20-month long experiment temporarily saved around 25,000 steel-related jobs, steel-consuming industries canned 200,000 workers due to the skyrocketing price of their primary raw material. It is estimated that each steel job saved cost the American economy over $400,000. Better that we just sent them each a check for a quarter million and called it a day.
There is an even better reason for avoiding destructive protectionist measures than just the loss of U.S. jobs: security. It is an objective fact that the world is a safer place as the result of commercial interaction. We are less likely to die from war and war-related disease, terrorism and genocide than at any time in the history of civilization.
Meanwhile, the share of the world’s population living in extreme poverty has plummeted from 80 percent to 20 percent over the past two centuries, due mostly to the expansion of democracy and the pursuit of the mutual benefits of international trade.
And consider this additional consequence of another tariff mistake. Not only will American consumers pay more and American workers work less, but our trading partners will most likely retaliate with punitive tariffs of their own. This, of course, was one of the proximate causes of the Great Depression, an economic cataclysm the lessons of which we thought we had digested. Sadly, we may not have learned our lesson.
Let us hope that wiser counsel will prevail. Our problems are sufficiently challenging without manufacturing a new one that is entirely avoidable.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager at Barnett & Co. in Chattanooga.