Thursday, March 8, 2018

Trump Tariffs Are A Solution In Search Of A Problem

President Trump seems determined to press forward with the fulfillment of his campaign promise to enact protectionist tariffs on steel and aluminum imports. Many on the right are asking why. The industries that Mr. Trump seeks to protect – and American manufacturing as a whole – are doing quite well.

In contrast to Mr. Trump's tweets claiming that the steel and aluminum industries are “dead” and in need of government revival, official statistics show a different story. Per a Commerce Department report, US steel production in 2017 increased by 3.4 percent. Steel mills were running at 74 percent of full capacity, a slight increase over 2016. At the same time, imports were slightly higher than in 2016, but fell in the last months of 2017.

A look at the long-term history of steel and aluminum production in the US shows that both are considerably above historic lows. Both industries have rebounded since the Great Recession and production appears relatively stable.

While the president has often targeted China with his anti-free trade rhetoric, China ranks eleventh on the list of steel exporters to the US per Marketwatch, making up less than three percent of American imports. Canada and Mexico rank first and fourth with 16 percent and nine percent of US steel imports respectively, yet President Trump has floated the idea of exempting the two NAFTA members from the tariff. With 25 percent of steel imports not subject to the duty, the effectiveness of the protective tariff would be undermined.

The situation is similar with respect to aluminum. At 56 percent, Canada is the largest importer of the metal to the United States per CNBC. It is followed by Russia, the United Arab Emirates and China. The fifth place category is “other” at 23 percent of imports. Even though, at six percent, China has a larger share of aluminum imports than steel, the proposed duty on aluminum is 10 percent, far less than the proposed 25 percent on steel.

Even the Aluminum Association, the trade group for aluminum producers, is opposed to the global tariff on aluminum. “We fear that the proposed tariff may do more harm than good,” Heidi Brock, the head of the association, told President Trump in a letter. Brock said that the group favors tariffs targeted toward China, whose overcapacity in the wake of a domestic downturn has led to increased exports and falling prices.

In essence, the proposed Trump tariffs are a mixture of bad possible outcomes. If the tariffs are successful in protecting the steel and aluminum industries, they will hurt other American businesses and consumers and possibly start a trade war in which countries apply tariffs to more and more goods. If the president decides to exempt our NAFTA partners, then the effectiveness of the tariffs will be undercut. Prices will still rise, but the US steel and aluminum companies will see a smaller benefit.

A better solution would be for the US to deal with China directly about concerns that it is flooding the market with cheap steel and aluminum rather than taking a shotgun approach. If it is absolutely necessary to take action against China, then it would be much better to single out Chinese exporters rather than antagonizing allies and larger trading partners.

The entire question of whether cheap imports from China are a bad thing should also be carefully considered. If China is sending us raw materials at a cost below market prices, they are in effect subsidizing American consumers at their own taxpayers' expense. American manufacturers and consumers benefit from China's money-losing strategy.

Originally published on The Resurgent

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