trade wars

Recently President Trump announced plans to impose tariffs of 25% on imported steel and 10% on imported aluminum, citing national security reasons.  He followed this up with a Twitter comment that, for the US, trade wars are good–and easy to win.

My take:

–much of modern economics stems from study of the causes of the Great Depression of the 1930s.  The key factors:  the wrong fiscal and monetary response, world wide; and the imposition of tariffs to “protect” local industry.  These did substantial economic damage, deepening and prolonging the global slump instead.  The idea that Mr. Trump may not be aware of this is the really worrisome aspect of the current situation.

 

–the first-order effects of the proposed tariffs will, in themselves, likely be miniscule.  Domestic prices for both metals will rise.  As a result of that, and of possible tariff payments to the government, income will shift from the users of the two metals to Washington and to domestic producers of steel/aluminum.  Because of this, at least some metal fabrication will shift away from the US to other countries.  One EU-based maker of appliances has already suspended plans to increase its manufacturing capacity in the US.

–second-order effects will likely be larger.  The EU, for example, is indicating it will retaliate by placing large tariffs on several billion dollars worth of goods that it imports from the US.   Presumably, other affected countries will do so as well.

 

–there was a similar incident during the Obama administration involving Chinese-made truck tires.  Economists estimate that it resulted in the loss of 3,000 American jobs.  If there was anything good about that situation, it was that it was isolated–Washington understood this was a one-off payment to a domestic union for its political support.  Today’s concern is that, despite overwhelming economic evidence to the contrary, Mr. Trump actually believes that trade wars are good–and will continue to act on that belief.

 

 

4 responses

  1. Pingback: What stocks to invest in = trade wars « PRACTICAL STOCK INVESTING | Stock Investing

  2. I read an interesting article on Bloomberg showing that only a tiny fraction of China’s steel exports actually go to the USA. Kind of shows how little China needs the US and strenghtens your argument that the USA will be at the losing end of the trade war.

    • Thanks for your comment. This is a complex issue, one where in many ways it’s clearer what not to do. In this case, the military is saying that the national security justification for tariffs is nonsense. Also, most often the protected industry does not use the breathing space it gets from tariffs to modernize production and lower costs (look at the heavily-protected auto industry in Detroit–import quotas–from the 1970s onward),. A gigantic loss of national wealth,, which didn’t save two of the Big Three from bankruptcy., nor the public from having sub-standard cars for decades. (I loved my 1980s Chrysler minivan, but the transmission dropped out three times while I owned it.) Sometimes the protected industry simply raises prices, as domestic steel and aluminum are now reportedly doing, improving their lot at the expense of the wider economy. Not only will domestic costs be higher, but export-oriented users of the metals shift their production out of the country, causing net domestic job losses.

      Conventional economic theory says the home country should accept the “gift” of low prices from foreign producers, while helping workers in industries hurt by imports to retrain and transition to other, higher value-added, jobs. On this score, for reasons I don’t understand, the US lags way, way behind the rest of the OECD in providing retraining assistance. It’s maybe only a quarter or a third of what other countries, which are more successful at retraining, spend per affected worker.

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