Today, the stock market closed trading after plummeting more than 400 points following President Trump’s announcement that the U.S will be implementing heavy tariffs on imported steel (25%) and aluminum (10%). The president’s rationale is that this move could give a boost to American employment figures, and ultimately, allow domestic industries to grow in areas in which they have observed substantial declines. However, there are a couple things to consider.
First, heavy tariffs could become the catalyst for a trade war with U.S. trade partners in the global economy, specifically members of the European Union, Mexico and China. The tariffs could cause these trade partners to retaliate by targeting American-made products, with the most significant move possibly made by China. If these countries decide to limit the amount of U.S. exports (i.e., Harley-Davidson, cheese, orange juice, tomatoes, etc.) it would trigger substantial losses by U.S industries.
The U.S. Commerce Secretary, Wilbur Ross, made an earlier suggestion to move in this direction because he believed that the U.S. government’s heavy reliance on imports could potentially be a threat to its national security. To substantiate his claims, Ross referred to a provision of the 1962 Trade Expansion Act, Section 232. However, among those also concerned about the negative impact of imposing global tariffs instead of targeted tariffs is the Department of Defense (DoD). In a memo to the Commerce Department, the Defense Department states,
“…the U.S. military requires only about 3 percent of U.S. production for steel and aluminum and cautioned against broad action…DoD continues to be concerned about the negative impact on our key allies…and targeted tariffs are more preferable than a global quota or tariff.”
In addition to this, a retrospective look at similar measures presented in 2002 during President George W. Bush’s administration should also be considered. The tariff implementation negatively impacted auto industry employment figures (200,000 jobs nationwide, including 30,000 in Michigan, Ohio, and Pennsylvania) and were only lifted when the World Trade Organization stated forcefully that the tariff measures were illegal. This move by the Bush Administration also caused several manufacturers to consider a move of some of their production to other countries, such as Canada or Mexico, which would allow them to bypass the tariffs altogether. As this relates to our contemporary context, if President Trump continues to follow this path, he could possibly see his new tax plan undermined as U.S. manufacturers seek to lower costs of obtaining raw materials. This leads to the next thing to consider.
Although this discussion has primarily focused on the impact on the automotive industry so far, a second consideration is that the implementation of these tariffs could lead to an increase in the prices of products manufactured domestically and employment losses. Jason Ware (Chief Investment Officer and Chief Economist of Albion Financial Group) stated that,
“There’s a quiet concern among investors about the potential of a trade war. Nobody knows what the real economic impact is and where it’s going to end. The notion of a trade war is also scary because it could lead to higher costs, and thus be inflationary in a general sense. This very idea could be fanning the flames of fresh inflation anxiety that, in part, amplified recent volatility pushing downs stock prices in February…”
The American Automotive Policy Council reported in May 2017, ”
“This would lead to lower sales of domestically built cars and trucks in the highly competitive U.S. auto market, a decrease in U.S. auto exports, and a loss of the jobs that those economic activities support. In the end, that would be a net-negative for the U.S. economy, and potentially the U.S. steel industry – the very sector such restrictions were designed to assist…”
When domestic industries are forced to pay higher prices for imported raw materials, they are not able to reduce the prices of their manufactured products. As a result, the U.S. consumer is forced to pay higher prices for U.S. manufactured products. Or, in order to try to maximize benefits in a competitive market and maintain a semblance of financial sustainability, manufacturers are sometimes forced to use a lower quality and cheaper raw material to produce their products.
Many have voiced their concern about the potential backlash from imposing these heavy tariffs. With this in mind, however, who really wins? In the end, even though the U.S. government may see an increase in revenue, the American consumer will be the group who suffer the most. This leads us to ask, “Is the President listening to what history is trying to say?”
Sean Mungin, author of “The Thorn In The Flesh”