This past week, President Trump shook both the markets and policymakers on the Hill with the declaration of an impending 25 percent tariff on steel and 10 percent tariff on aluminum.
While the exact details remain uncertain in terms of both types of steel products and whether there will be any nations excepted, such a tariff will likely be even more futile and restrictive than when former President George W. Bush implemented one in 2002.
The tariff is primary being sold by the administration as a measure to support American steel and aluminum manufacturing jobs, which account for up to at most several hundred thousand jobs in the U.S. However, industries reliant on metals, ranging from automobiles to construction to bottling, account for jobs numbering at least 4.5 million.
The tariff, by raising their cost of doing business, puts those steel-reliant jobs at risk and will prevent new ones from being created, all in exchange for an uncertain bid to restore metals production jobs. Note that the Bush tariff, in spite of its intentions, only temporarily slowed the decline in U.S. metals production employment.
Besides the Dow Jones industrial average dropping almost 1000 points this past week in response to the news, right now it looks like our trading partners ranging from Europe to Canada are considering retaliatory tariffs against American products.
The combination of increased costs for metals-reliant industries with potential retaliatory tariffs means U.S. companies across the board will possibly face decreased global competitive ability if the tariffs are implemented as they currently seem structured.
Free market principles generally presume in favor of lowered barriers and against tariffs, except for in situations where there are clear trade abuses that require action. For example, the Trump administration’s action in January of implementing tariffs on washing machines came after an extended investigation by the International Trade Commission.
The ITC had determined that there was a systematic evasion of U.S. trade laws and market distortion that required narrow punishment, as was implemented. The enforcement actions determined were not meant to be a permanent state of affairs but rather only to encourage compliance with free trade market principles.
In contrast, these tariffs were not the result of any prolonged investigation or study, but rather seem geared towards a certain political proposition. As Trump stated in the tariff announcement, the tariff is less about surgical economic action but rather because he believes without steel production “you almost don’t have much of a country.”
Essentially, it appears Trump believes that a domestic steel industry is necessary as a national symbol, no matter the economic headwinds. While certain national policy restrictions are generally considered proper while still embracing a fundamentally free trade paradigm, these are mostly restricted to national security concerns such as with the Committee on Foreign Investment and its review of Chinese acquisitions of U.S. businesses.
Free trade has done extraordinary good over these past few decades in driving down costs across nearly all products and industries as well as driving innovation through competition. There undoubtedly could have been better efforts made at times to transition those in displaced industries and to clearly explain the rationale and function of the complex international trade system, as we saw in the disastrous Trans-Pacific Partnership debate several years ago.
Indeed, one reason for Trump’s election was how he struck the nostalgic nerve that had long been swelling in America, promising a return to a time long gone both technologically and economically. If these tariffs truly go into effect, undoubtedly we shall soon begin to see the economic turmoil wrought in a cycle that could escalate unpredictably, with also perhaps needlessly negative effects on our diplomatic relations as well.
The international trade framework is extraordinarily complex and policymakers will need to do a better job in the future of creating buy-in with the public. In the meantime, the economic gears of the tariff may sadly provide a direct lesson in the meantime.
Erich Reimer is president of Nueva Horizons LLC, a D.C.-area public affairs strategy and political risk consulting firm specializing in a portfolio including technology, financial services, energy, defense, and trade.