Front Burner: What do tariffs mean for U.S. economy?
Beyond trade war hyperbole, 1 cent extra for a can of soup
Free trade is not a bad thing; it is the underpinning of a market-based economy.
The Trump administration’s announcement of tariffs of 25 percent on imported steel and 10 percent on imported aluminum was, as are virtually all things coming out of Washington, D.C., these days, greeted by hyperbolic pronouncements on both sides of the issue.
Before touching on some of the breathless claims being made surrounding these tariffs, let’s first look at what the tariffs would mean for the U.S. economy.
These tariffs are a tax levied on imported steel and aluminum. They would raise the price in the U.S. of these commodities produced by foreign producers relative to the price of domestically produced steel and aluminum.
Domestic producers of steel and aluminum will benefit from these tariffs as more customers would be willing to purchase from domestic producers at the now relatively lower prices. As the domestic manufacturers increase production to meet the tariff-triggered increase in demand for their products, employment in the domestic steel and aluminum industries will likely rise to fuel the increased production.
The winners from this policy are a quite concentrated group — domestic steel and aluminum firms and their workers. The losers are more dispersed and include all domestic industries that use steel and aluminum in the production of goods and services, the workers who work in steel- and aluminum-consuming firms and, last, consumers of these products who may face higher prices as these increased input costs get passed along.
As is often the case in the political economy, these tariffs create concentrated winners but dispersed losers. We can thus expect the loudest voices and largest number of lobbyists to materialize in favor of the tariffs. I suspect we will not be seeing widespread protests over the fact that the price of a can of Campbell’s Chicken Noodle Soup may go up by a penny.
But when you add up the costs of these tariffs across construction, aerospace, consumer goods, appliances and the many other sectors of our economy that will be hurt by higher tariffs, the costs will be significant. The net effects for the U.S. economy will be negative.
However, immediately claiming that these actions are the start of a destructive trade war that will undermine the global economic recovery is, to say the least, a bit of an overreaction to tariffs on a couple of commodities.
The fact is that trade wars are not easy and they are not winnable. There are no winners in a trade war; history has shown us this. It is this mutually assured economic destruction that will, in my opinion, prevent such an all-out war from occurring.
Tariffs and protectionism in general are a slippery slope, and the Trump administration should proceed with caution.
Free trade is not a bad thing; it is the underpinning of a marketbased economy.
Trade deficits, whether bilateral or overall, are not necessarily a bad thing either. The money that goes overseas doesn’t evaporate; it gets reinvested. The money is reinvested in U.S. Treasury bonds, U.S. stocks, real estate and other investments that help America’s economic growth.
When we import goods from the rest of the world, the rest of the world is exporting capital to the U.S. This capital inflow has helped keep interest rates in the United States much lower than would have been the case if we had to self-finance the trillions of dollars in deficit spending the federal government has engaged in over the past decade-plus.
Free trade is not always fair trade, and in instances where countries are stealing U.S. intellectual property by reverse engineering or industrial espionage, violating patents and trademarks or dumping products below cost to undermine domestic industry, action is justified.
Wielding the stick of tariffs or other protectionist policies can serve a purpose in such instances and thus far the Trump administration has been sparing in its use of the stick. Let’s hope it stays that way.
Sean Snaith is director of the University of Central Florida's Institute for Economic Competitiveness.