In a trade war, one folly begets the next. Take Donald Trump’s opening shot: a punitive tariff of 25 percent on steel. Alas, what is supposed to shrink an endemic trade deficit and intimidate rapacious foreigners has hit hardest at home. While U.S. steel manufacturers are gaining protection from more efficient competitors, the country as a whole is footing the bill.
The mechanics are all too familiar. When domestic steel producers like U.S. Steel and Nucor immediately raise prices to fatten up their profits, thousands of steel-using companies take a hit. Nucor has just reported its second-largest earnings in history. No wonder its CEO, John Ferriola, has clapped his hands in delight: “The tariffs are working.”
True, but only for the stockholders and 140,000 workers in the steel-making industry. The losers are the 6.5 million who turn out stuff made from steel: cars, construction machinery, farm equipment, and so all all the way down to soda cans and razor blades. As Nucor celebrates windfall gain, Ford has just reported a fall in profits by one-half. General Motors has issued a profit warning, pointing to a 33 percent surge of steel prices.
What’s next? Jobs will be cut or exported. Trade barriers invariably prompt retaliation. And American companies will leapfrog over them, setting up shop abroad.
For example: Harley-Davidson, hit by EU counter-duties, is planning to move the production of its “hogs” destined for Europe to Thailand. These machines would not be subject to Brussel’s double-digit tariffs on U.S.-made bikes. To shift production to Asia would be a perfectly rational move for Harley, but a deadly blow for the company’s workers in the Rust Belt who voted for Trump in 2016. The President thinks that he is “really smart.” The upcoming midterms may issue a different verdict.
That’s in part because trade wars tend to exacerbate crony capitalism or, as Trump puts it, “the swamp.” Companies hit by the steel tariffs are free to plead for exemptions, and as of now, around 20,000 appeals for relief have flooded into Commerce. But Nucor, U.S. Steel et al. know how to work the levers of political power. They are pressing the Trump Administration to deny exemptions. Having captured extra profits—unearned ones—they want to lock in the bonanza, never mind the 6.5 million workers who are staring impoverishment in the face.
There is a good chance that the steel-making behemoths will win this mano-a-mano. As the New York Times reports, Nucor and U.S. Steel “have successfully objected to hundreds of requests,” putting to use their “deep ties to administration officials.” This whole tale reads like anti-capitalist agitprop, but the evidence of influence-peddling is hard to deny. The President who pledged to “drain the swamp” is actually feeding it. This is crony capitalism à la Russia in the citadel of free markets.
Protective tariffs to serve the wellbeing of the entire nation have been the promise. Yet trade constraints only fill the coffers of privileged groups while harming the nation. Acting like a tax, duties raise the price of imported goods and lower real income for tens of millions of consumers. This is bad for the country, and a boon for those who can harness the government for their own interests.
Nor does the folly end here. To help America’s farmers hit by Chinese counter-duties on pork and soybeans, Trump is readying $12 billion in relief—welfare for America’s efficient producers who were doing just fine before Beijing’s retaliatory tariffs kicked in. Naturally, a plethora of other industries will clamor for compensation, and so the U.S. Chamber of Commerce warns that aid package may swell to $40 billion. As Forrest Gump famously put it: “Stupid is as stupid does.”
Let’s turn to the macro side of this farce. The Trump Administration has declared trade war for the express purpose of shrinking an endemic U.S. trade deficit. A trade surplus has not existed seen since 1975. Theoretically, the gap should have begun to narrow when the President hammered Europe and China with his punitive tariffs. But look again: in June, the deficit widened dramatically by 7.3 percent.
Economists are not surprised. All told, tariff walls don’t make a difference. The real drivers are macroeconomic. Deficits yawn when a country consumes more than it produces or the government spends more than it takes in—which is precisely the case for the United States. Logically, imports must make up for the difference.
Add to this logic the recent facts: a booming economy boasting 4.1 percent growth, a stronger dollar and a runaway federal deficit under Trump. In FY 2016, it was $585 billion; in FY 2018 it was $833 billion. The faster a country grows, the more it will import; the same goes for profligate government spending. Both inject more purchasing power into consumers’ wallets. Finally add a rising dollar that stimulates imports as well, because foreign goods become relatively cheaper. This is not rocket science, but Economics 101.
Economics 101 also teaches that everybody loses in a trade war. Certainly, America’s consumer and worker are not winning, as this string of follies shows. What’s in it for them as they watch the prices of cars, refrigerators, washing machines and lawn mowers rise? As those who toil in export industries look at layoffs, and farmers plow under soybean fields? It takes a “stable genius” like the 45th president to defy economic logic and kick his electorate in the shin in the name of “making America great again.”