J: On March 1, President Trump went well beyond the recommendations arising from two "investigations” of his own Commerce Department and announced new US tariffs (taxes) of 20.0 percent on imported steel and 10.0 percent on imported aluminum. The Secretary of Commerce is Wilbur Ross, a renowned turnaround expert who made a fortune buying up bankrupt steel mills and putting them together into profitable entities. He has long demonstrated his protectionist tendencies (a common thread among most steel magnates) and in his cabinet position he has been able to act on these tendencies.
What is surprising about this move is that the two investigations were conducted under Section 232 of the Trade Expansion Act of 1962. This section deals with national security and it has rarely been used before and never for steel or aluminum. (L: Why anything at all done by this administration would be surprising to Jim surprises me.)
There had been only 28 prior investigations like this since 1962 before these two. The last action on these grounds was one by President Reagan in 1986 against some types of imported machine tools. Those tools may have actually been risks to national security.
Total steel imports in 2017 were $29 billion and aluminum imports were $17 billion. These were only 1.9 percent of total US goods imported in 2017. (L: And at no time has steel or aluminum sales been seen as a threat to national security.)
One of the worst parts of President Trump’s decision under the provisions of Section 232 is that there are essentially no limits to his powers. He not only has the authority to decide on the size and form of the trade restrictions, but he also can determine whether, when and under what circumstances they could ever be ended. This is really frightening.
For more details on these actions, see this article by Chad Brown of the Peterson Institute for International Economics. The Wall Street Journal called these new tariffs “…the biggest policy blunder of his Presidency.”
They point out that there are only about 140,000 people employed in making steel in the US. There are over 6.5 million people who work in steel-using industries. All of them will be hurt along with the hundreds of millions of consumers who will have to pay higher prices for all products made using aluminum or steel. (L: So, said in a more crass way, the President has thrown 6.5 million workers under the bus for 140,000. Our state and federal governments never apply an axiom like, “the most good for the most people,” but good grief, this is ridiculous.)
A study by Professor Arthur T. Denzau of Washington University showed that the 1984 voluntary export restraints (VER) on steel imports potentially saved 14,000 jobs in steel manufacturing but cost 55,000 jobs in steel-using industries. That does not sound like a very good exchange.
A paper by Mark Perry contains a very useful table of the costs of saving one job in a protected industry. The shocking results are that it costs $1.6 million to save one job in carbon steel manufacturing and $2.2 million for one job in specialty steel. This is really an outrageous action by the President. (L: Is there no other use for that money? Even this President has other ways to spend that money—guns in schools, giant walls, etc.)
It is not very surprising that the International Monetary Fund (IMF) issued a statement on March 2 saying these tariffs “…are likely to cause damage not only outside the US, but also to the US economy itself…” We should expect to hear much more from them in coming weeks about the highly detrimental impacts of these actions as well as any retaliatory ones taken by other countries.
The overwhelming majority of economic forecasters have been worried all along that President Trump could seriously hurt his pro-growth agenda with protectionist actions. It is still possible that cooler heads in business and in Congress may be able to get the President to change his mind and either drop these new tariffs or reduce the rates significantly.
Keep watching this one. It’s a really dangerous move.
L: All I can picture is a graph that Jim has used to show the death spiral of world economic activity at the start of the Great Depression (1929-1933) when there was a tariff war caused by the US. Look up the Smoot-Hawley Tariff Act to scare yourself. (The graph was originally created by the late Professor Charles Kindleberger, one of Jim's heroes.)