Protectionism is like dope. First you get a brief rush, and then you crash. Junkies know this, but they go for meth, crack, and smack over and over again. So do trade warriors. They think they can enjoy the kick without having to pay the price down the line. They believe that trade walls are good for the nation, damn the evidence. “This time it is going to work,” they say, beguiling the credulous. But it never does, not for advanced economies as heavily enmeshed in world markets as is the United States.
Now Donald Trump is hawking the snake oil. But wait! Didn’t he sweet talk the “globalists” at their annual Davos bash by cooing that “America first” does not mean “America alone?” Didn’t he tell them that America was wide “open for business?”
Sure, but as they say, actions speak louder than words. Just before hopping on Air Force One, Trump launched the first shots against two mighty American competitors, China and South Korea. He slapped a 30 percent punitive tariff on solar cells and panels while hitting washing machines with a 20 to 50 percent tariff, plus quotas. In an editorial, the Wall Street Journal minced no words. The headline read: “Trump Starts His Trade War.”
How did Trump justify his opening salvo? “Our action today helps to create jobs in America for Americans”—more for us, less for you! Before we consult trade theory, let’s savor the irony. The move on the solar front came in response to the complaints of two U.S.-based companies. One is Chinese-owned Suniva, which had filed for bankruptcy. The other is SolarWorld America, whose German parent had declared insolvency last fall.
So making America “great again,” comes down to being nice to two countries that are among America’s fiercest rivals in the global trading arena. In soccer, they call this an “own goal.”
Let’s play truth and consequences. In the United States, Korea’s washing machine giant LG reacted by announcing a $50 price hike for its laundry appliances. Goldman Sachs predicts higher prices in the range of 8 to 20 percent. So the first effect of the Trump tariff is to make American consumers poorer because pricier goods lower real income.
But do the duties at least enrich coddled companies and their workers? Initially, they may preserve profits and jobs. Now, look again. The two solar cell companies demanding protection used to have 3,200 workers. On the other hand, the entire solar industry, which assembles the stuff, designs the software and puts the contraptions on roofs, employs 260,000 workers. If key ingredients like cells and panels become more expensive as result of the Trump tariff, the price for the end product goes up, as well.
Down go demand, revenue and employment. The Solar Energy Industry Association (SEIA) predicts a loss of 23,000 jobs. Do the worst-case arithmetic. If you save, perhaps, 3,000 jobs at those two failing companies, you might lose eight times as many in the industry. Not smart, to use Trumpspeak.
Back to Mr. and Mrs. Consumer. Say they were planning to install their very own power plant on their roof. But if prices go up, the project goes down. They will postpone the purchase or stick with the local utility. Hence, overall investment drops, and so does employment in the solar industry for roofers, mechanics, software designers and suppliers.
The same goes for the laundry room downstairs. Once LG and Samsung respond to the tariffs by raising prices, their American competitors like GE and Whirlpool are free to do the same. So consumers are hit once again.
Nor does this tale of woe end here. The snake oil of protectionism promises to make the country as a whole better off. But it doesn’t. It merely helps a small privileged segment—the beneficiaries of tariffs and import quotas. The many always pay for the few, and the country as such loses out in the global trade competition. Why so? If the prices of protected products like solar systems and washing machines rise, their U.S.-based makers will falter in the global market where leaner and meaner rivals push them aside. So still more job losses.
In the long term, the most insidious effect of privilege is indolence. Recall the old U.S. automotive industry protected by government regulations and popular tastes for gas guzzlers. At the beginning of Detroit’s long decline in the 1960s, folks just laughed at those funny Beetles and boxy Japanese contraptions trying to look like a stunted V-8. Detroit just kept building the same old stuff while the global competition worked on looks and technology. Now, only GM and Ford are left. The rest died or fell into foreign hands. Spare the rod of competition and spoil the industrial child.
For Donald Trump, the worst is yet to come. Start a trade war, and your rivals will retaliate, shutting out U.S. exports. In the tit for tat, he will not create, but destroy “American jobs for Americans.” Meanwhile, note yet another irony. The key target of the solar tariff is China. Yet China is only number four among foreign suppliers of solar cells. Hence, the profiteers of Trump’s opening move will be Malaysia, South Korea and Vietnam. Their exports will rise, creating zero American jobs. The same story holds true on the laundry front, where South Korea will fall back while Mexico takes up the slack.
The worst outcome is lurking in the wings. Trump has threatened retaliation against the “very unfair” European Union. If he goes through with it, Brussels will hit back. Who will lose out? Workers and consumers on either side of the Atlantic—all thanks to Donald Trump, the “very stable genius.”