Tariffs are a victory for the swamp

  • 5 March 2018
  • NormanL
Tariffs are bad policy and worse economics

The Trump administration's decision to impose tariffs on imported steel and aluminium has raised concerns the United States may find itself in a destructive trade war with other nations.  While such fears may be overblown, they are not without merit. The European Union is considering imposing tarrifs on a host of U.S.-made products, including Harley Davidson mortorcycles, blue jeans, and bourbon.

In a Twitter post, the President said trade wars are "easy to win." He may think so, but no war has ever been fought that did not have losers. And in a trade war, the losers are always, and without exception, consumers and businesses.

Consider this example about the construction industry, from National Review's Kevin Williamson:

For big, multi-family developments, many steel and aluminum components are pre-ordered, but at a price that is subject to change. What happens is that developers give their suppliers a general idea of what they’re going to need, but some details (say, the color of finished pieces) remain unresolved until well into construction. The actual order doesn’t take place until those details are worked out, and the price is subject to upward revision up until then. So right now, developers are in a rush to fast-track those pieces before the tariffs kick in.

“Most of our steel is already ordered,” says one project manager involved in a large multifamily development in the Bay Area, “but not our finished aluminum panels. We don’t need them for another six or seven months, but our metals subcontractor says our supplier may be raising prices within the next week to 30 days. A 10 percent increase in raw cost may be 15 or 20 percent for us, so we’re scrambling to get everything approved.”

The price of steel and aluminum may represent only a small share of the final cost of a Toyota Tundra (built in San Antonio) or a Caterpillar tractor-scraper (made in Decatur, Ill.), but it’s a big part of the budget for builders. “Our margins are only 4 percent,” the project manager says. “If we don’t have an agreement that allows for escalation, that could be devastating. If steel is 6 percent of our cost but goes up 25 percent in price, it will significantly eat into that margin. To make projects pencil out, raising that price could make a project not feasible any longer.”

The situation is worse for builders of large commercial projects such as office towers, which are much more steel-intensive than more residential developments. Reshuffling those bids causes chaos in the present, and it also adds to labor and administrative costs. One developer reports that his expenditures related to trying to outrace the tariffs already are running into six figures.

Tariffs increase domestic prices. Those price hikes are passed on, eventually hitting consumers. They are made poorer. The beneficiaries? Domestic steel and aluminum producers, who enjoy a government-enforced windfall.

Or look at tariffs this way: they are a crony capitalist's dream, and clear victory for the dreaded swamp:

Decades ago, the Nobel Prize-winning economist Milton Friedman argued that businessmen themselves are among the biggest dangers to a free-market economy. They often seek government privileges to increase their profits and avoid competition. Indeed, import taxes — putting aside rhetoric about defending jobs — are well-known to have devastating effects on consumers. They are quite effective at lining the pockets of shareholders in protected industries.

And we've been here before under Republican presidents. George W. Bush hiked steel tariffs, and eventually had to walk them back because of the economic problems they caused:

In 2002, President George W. Bush implemented his own steel tariffs. As expected, the taxes jacked up the price of domestic steel and temporarily boosted the industry’s profits. Steel-consuming industries, however, weren’t so lucky. According to an estimate from the nonpartisan Trade Partnership Worldwide, a staggering 200,000 people lost their jobs in downstream industries by the following year. That’s more workers than the entire steel industry had at the time.

According to the United States International Trade Commission, other serious consequences of the tariffs included difficulties obtaining steel in the quality and quantity desired, a shift to sourcing finished parts from overseas, and relocating domestic steel-consuming facilities abroad.

Ronald Reagan, who was a friend of free trade and defender of free markets, got rolled on tariffs by the protectionists in his own administration. As Steve Hanke writes in Forbes:

...we lost the battle on trade within the Reagan administration. Remember the infamous “voluntary restraint agreement,” in which the Japanese agreed to restrict car exports to the U.S.? It was all a total horror show, one that Reagan supporters like to sweep under the rug. But as Douglas Irwin suggests, that’s hard to do. Indeed, the share of American imports covered by some sort of trade restriction soared under “free-trader” Reagan, moving from only 8% in 1975 to 21% by 1984.

But some will argue that the Reagan years were boom times for the economy as a whole. True enough. His tax cuts and tax reforms, plus a deregulatory push and a burgeoning tech sector, helped push the economy to new heights.

The gains would have been even greater, and Americans made even richer, without the dead weight of tariffs and protectionism.