Trump Tariffs: An Economic Analysis
This year, the administration of President Donald Trump has initiated a number of tariffs aimed at producer economies such as China. During this period, the trump administration has overlooked economic reasoning concerning the negative effects that these tariffs may have on domestic producers and consumers. Particularly prominent, the tariffs on steel and aluminum, which are 25% and 10% respectively, were announced March 1st of this year. These tariffs were covered in an article by Scott Horsley, published March 8, 2018.
The first concern that tariffs introduce is the possibility—or rather certainty—of higher consumer prices. The United States is a net importer of steel and aluminum. These refined materials are used by domestic secondary producers to fabricate products. In addition to domestic manufacturers using steel and aluminum at higher prices to make consumer goods, these firms also make capital goods such as machinery. As the costs of domestic manufacturers inputs and capital goods rise, the consumer price of the output products will rise as well. The higher price that results from tariffs can be demonstrated by a simple supply and demand curve.
Any tariff can be analyzed by the graph above. As the world price of the good (in this case, steel and aluminum) is below the nation’s equilibrium price, the U.S. is a net importer. The tariff roughly doubled the cost of the product when compared to the world price. The loss to society (or deadweight loss) is demonstrated by the two red triangles. The deadweight loss and tax revenue came at the expense of the consumer surplus. It is also important to note the gains in producer surplus, showing how domestic industry benefited from the tariffs at the expense of the consumers. The way this graph applies to Trump’s tariffs is the same as it would apply for any other tariff. The beneficiaries however, should be defined more carefully. Due to the fact that the tariff is being placed on a good that is produced by primary industries, it benefits producers of refined steel and aluminum. The yellow “producer” section of the graph is constituted of these producers. The green “consumer” section of the graph makes up the consumers of products such as conduits, pipes, wire, and rolled steel and aluminum. It is important to note that the consumers of these products are domestic secondary producers, rather than the economic actor that is typically considered the consumer.
Tariffs also create a number of false incentives, of which the most prominent is a misallocation of capital resources. Due to an artificial price floor instituted by the government, tariffs act in a way to conduct investment into the industry subsidized by the tariff. As mentioned in the article, Century Aluminum planned to invest $100 million in a Kentucky plant due to the proposed tariffs. Although additional investment in the economy may sound beneficial, especially to the plant’s workers, this is the wrong type of capital investment. This investment was caused by a government policy not allowing the free market to function. The will of society acting through the mechanism of the free market should deliver or retract capital to and from investments. Investments are supposed to flow towards businesses that make use of resources such as land, labor, and capital efficiently. Under a tariff, investment capital flows to the dying and inefficient industries that are attempting to be saved, therefore starving other enterprises of capital. Raising the price of steel and aluminum through tariffs or other government legislation benefits that industry at the expense of other businesses.
The article mentions that Century Aluminum is planning on calling back 300 workers, while US Steel is calling back 500. Although the president is certainly very happy about these new jobs being created or brought back, it may not necessarily be beneficial to the economy. Rather, the products of productive labor, new and better goods and services, are what really grows the economy and increases living standards. For example, we could have workers building cities, tearing them down, and then rebuilding them in a perpetual cycle, but this would not grow the economy because it is not productive labor. Jobs that are economically productive are deemed productive by their existence in the private sector. If the jobs did not exist, and then they magically appeared due to government fiat, there must be a flip side to the coin. In economics there is always a cost. Due to the fact that the tariffs will cost secondary industries billions as well as contribute to unemployment in those industries, the policy’s costs outweigh its benefits. To put it another way, the work that the steel and aluminum workers are once again performing due to these tariffs is less efficient than work abroad is, because the U.S. companies needed the subsidy of a tariff to be competitive. Saving a few hundred of even a few thousand jobs in the short run through such a policy will result in more lost jobs and lower economic growth rates in the future.
New tariffs on steel and aluminum threaten consumers and domestic secondary industry at the expense of domestic primary industry. These tariffs, along with several other systemic problems, will continue to weaken the U.S. economy and make it less competitive worldwide due to the misallocation of labor and capital resources and higher consumer prices. Tariffs have found favor with Donald Trump, but will the economy be able to tolerate them?