President Trump has announced that he is planning to impose long-term tariffs of 25% and 10% on steel and aluminium imports. His argument is that these two industries have been facing decades of unfair overseas competition, resulting in the loss of American jobs and been one of the causes of the large US balance of payments deficit. He tweeted earlier this week that “We want free, fair and SMART TRADE.” Implicit in his argument is the idea that countries exporting to the USA are unfairly helping their domestic industries rather than being able to export cheaply because they are more efficient than US steel and aluminium producers. However it is not always easy to decide whether an industry is being artificially favoured through some sort of subsidy (cheap energy for Chinese steel makers has been mentioned) which allows it to compete unfairly or whether it is able to sell more cheaply because of lower costs through, for example, cheap labour, more efficient management or economies of scale achieved through its size. He also argues that steel and aluminium imports threaten national security, presumably if the US went to war with its trading partners!
The impact of the proposed tariffs is not. clear-cut. Although US steelworkers will benefit from reduced imports and increased domestic output, any user of steel in the US is likely to have to pay higher prices either because they will buy more expensive domestically-produced steel or because they will continue to buy from overseas and pay the tariff. Thus, US car workers might find that their cars are now more expensive, leading to an increase in foreign cars imported into the US and a fall in domestic production, thereby creating unemployment in the motor industry. Many industries using steel and aluminium, such as construction and the drinks industry (because of the cans they use) would also be adversely affected as would US consumers who will have to pay higher prices because of the tariffs. In economic terms, their consumer surplus (the extra utility they receive in excess of the price paid for the product) will be reduced. Some of this lost consumer surplus – a welfare benefit for the economy – will go to the government via the revenue from the tariff and some will go to US producers whose output has increased. However there will be a net welfare loss since higher prices will discourage consumption, with consumers turning to alternative products which provide less satisfaction. There is also likely to be a negative impact on labour since the number of steel and aluminium workers favourably affected, given that these industries are becoming more capital-intensive, is almost certainly smaller than those in other industries who will suffer from the falling demand caused by rising prices after the tariffs.
The tariffs are likely to provoke retaliation with the EU, Latin America and China talking of counter-measures on US goods such as Levi’s jeans, Harley-Davidson motorbikes and Bourbon whisky, and the WTO warning of the dangers of a trade war which President Trump has tweeted will be easy for the US to win. Following the EU’s talk of retaliation, President Trump has further escalated the issue by talking of imposing tariffs on EU cars exported to the USA. Fears of a trade war, with countries retaliating and then the US imposing further protection, caused a fall in stock markets in Asia, London and Wall Street. For the UK steel industry, the situation could be serious since almost 15% of our steel exports go to the USA.
Possibly most importantly to economists is that the tariffs mark a move away from the principle that free trade is beneficial to the world economy, enshrined in the principle of comparative advantage, where countries specialise in the production of goods and services in which they have the greatest comparative advantage (akin to the lowest opportunity cost of production) and import other products. With countries specialising according to the theory, resources are optimally allocated, and consumers benefit from lower prices. Try explaining that to a US steel worker.