OPINION: Understanding President Trump's tariffs
I recently sat down with professor Wayne Geerling, a senior lecturer in economics here at the University of Arizona, to discuss President Donald Trump’s decision to impose tariffs on steel and aluminum, as well as potential trade wars.
The idea was to take issues I’ve heard UA students argue over extensively and get a professional economist’s opinion on these topics. I’ve always held that the best way to think politically is to think in terms of economics.
Here is our conversation, edited for space and clarity:
The Daily Wildcat: Could you begin by telling us what a tariff is and how it works? Why did President Trump announce tariffs on steel and aluminum of 25 percent and 10 percent, respectively?
Wayne Geerling: The WTO [World Trade Organization] has a clause called “National Security” that allows nations to impose tariffs in industries that are of essential use. So, that’s the main motivation behind it — the motivation president Trump has used publicly, anyway.
A tariff is effectively a tax on imports. What it does is raise the price of goods entering the American market. When they come into port and go through customs the cost of steel would effectively be 25 percent higher and the aluminum would be 10 percent higher.
The aim here is to lessen American reliance on imports of aluminum and steel and help the domestic industry compete with international competitors.
DW: What is the domestic industry looking for in this case? What are they looking to gain?
WG: The two main benefits are to protect existing jobs and to expand existing industries. If America were importing less steel and aluminum, then the deficit would be met through rising domestic production. There are approximately 140,000 people who work in the steel industry in America.
The other thing to bear in mind is that this was a key campaign pledge by the president as well, the idea of protecting American jobs. Bringing jobs back to America is one that resonates with his base. That’s an important campaign pledge he needs to deliver on.
DW: Do you see any potential drawbacks or unintended consequences from this policy?
WG: There are a lot of drawbacks; these tariffs are effectively a tax on everyone who consumes steel. This point is often lost. It’s easy to see the winners here. The domestic steel and aluminum industries will benefit in the short-run, absolutely, but steel consuming industries who employ about 6.5 million people in the United States will be hurt —it’s a tax on them.
Cars, computers, TVs, aluminum cans — these products all use steel. There are a lot of people in America that work in industries that will be affected by this because the tariffs will essentially raise the cost of doing business.
Many businesses that use steel as an intermediate import will be affected by this. This is an unintended consequence. The idea of the policy is not to hurt American firms, but it will happen as a result.
Production costs will rise; some of these firms will become less competitive. The other issue is that consumers will be paying more for these products at the end. Buying cars, fridges and all the other products that use these metals will cost more.
There are negative effects for producers who use steel and aluminum as an input, and consumers who buy the same products. The key thing to bear in mind here is that the policy is directed at the 140,000 people who work in the steel industry but it’s posing a tax on the 6.5 million people who work in industries who use these products as intermediate goods, which doesn’t sound like a great trade-off.
The other thing to consider is that these policies are not designed in a vacuum. Protectionist policies that impose tariffs on imports may involve tit-for-tat reprisals. Mexico and Canada have been excluded from the steel and aluminum tariffs because President Trump is trying to use this as leverage to re-negotiate the North American Free Trade Agreement [NAFTA] on more favorable terms.
But steel imports from other countries are affected.
The EU, for example, has signaled a willingness to hit back with a 25 percent tariff on $3.5 billion worth of American goods, targeting Republican states which are predominantly rural, which will hurt farmers. Basically, farmers might end up being collateral damage here.
DW: Are there any historical precedents which help us understand how this policy might play out over the next few years?
WG: To find a similar precedent with similar logic, you need to go back to president George W. Bush. In 2002, he increased tariffs on steel. It’s pretty much a line-for-line comparison. GDP fell by about $30 million. The U.S. lost 200,000 jobs; many of these were in the steel industry as well, which is important to remember.
The WTO ultimately ruled the tariffs illegal and they were rescinded. The short-term benefits here are obvious, and I think the political benefits for President Trump are probably as important as the economic benefits.
The boomerang effect is important here. That is, there’s going to be a lot of collateral damage. Domestic producers who use steel as an input will be hurt, consumers will be hurt and American exporters, particularly farmers, are going to be the big losers in any potential trade war.
We must judge a policy by its outcomes, not its intentions, to paraphrase the late Milton Friedman. My view, and the view of most economists, is that these tariffs will do more harm than good to the American economy.