The controversy over President Trump’s proposed tariffs on imports of steel (25 percent) and aluminum (10 percent) is less about economics than ego — Trump’s ego. Frustrated by special counsel Robert S. Mueller’s III investigation and the reported chaos in the White House, the president, it seems, had to show who’s boss and who’s driving events. Hence, his broadside attack against many traditional U.S. allies, including Canada, Japan and Mexico.
The danger is that Trump, in a fit of political and personal pique, will effectively destroy the post-World War II trading system, which has been a boon to the United States and much of the rest of the world. And for what? To keep himself occupied and entertained. It seems a dubious bargain.
Already, the dispute has led to the resignation of Gary Cohn, the White House’s chief economic adviser. As with many trade conflicts, the details are confounding. Here are five things you need to know:
(1) Though the tariffs are stiff, they’re small in the context of the entire U.S. economy or global economy. Chad Bown of the Peterson Institute for International Economics estimates that the covered trade is $46 billion. That’s two-tenths of 1 percent of the $20 trillion U.S. economy (gross domestic product) and even less of the nearly $80 trillion world economy.
(2) The critical question is whether other countries retaliate against Trump’s tariffs. They assert they will. News reports suggest that the European Union might impose tariffs on Harley-Davidson motorcycles, Kentucky bourbon and jeans. Trump says he would respond by raising tariffs on European vehicles. The United States and its main trading partners could slide into a tit-for-tat trade war that — by discouraging trade and related investment — would slow the global economy.
(3) There would be little net U.S. job gain from protecting the steel and aluminum industries — and there might be a loss. Imports would recede, and U.S. steel and aluminum firms might hire more workers. But their gains could be offset, or more, by job declines in industries that use the metals: vehicles, construction, canning. Higher metal prices might be passed on to consumers, discouraging demand. A study by the Trade Partnership — a business-backed research firm — estimated that the tariffs would add 33,000 steel and aluminum jobs, while costing 179,000 jobs in other industries.
(4) Although China is the main cause of a glut in global steel-making capacity, it is hardly touched by Trump’s import sanctions. According to Bown’s calculations, China represents only 6 percent of U.S. steel and aluminum imports. By contrast, Canada represents 26 percent and the European Union 16 percent. China’s share is so low because many of its imports have already been hit with penalties to remedy illegal “dumping” (selling at unrealistically low prices) or government subsidies.
(5) The root cause of chronic U.S. trade deficits is the dollar’s role as the major international currency, used by many companies and individuals — not just Americans — to conduct trade, make cross-border investments and hold money for safekeeping. The extra demand for dollars keeps the exchange rate up, making U.S. exports more expensive and imports cheaper. Though trade deficits result, they reflect U.S. strength more than weakness.
The case for Trump’s tariffs looks shaky. It’s true that the high dollar makes life harder for U.S. manufacturers. It’s also true that China overinvested in steel-making (since 2000, global capacity has roughly doubled). The solution, if there be one, is to negotiate temporary worldwide production cuts, including in China.
None of this justifies Trump’s extreme protectionism, which might do us more harm than good. Don’t expect Trump to respect these ambiguities. For him, it’s mostly a matter of pride, not policy.
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