TRADE-OFFS

Donald Trump is planning a trade war, and the first casualty will be American jobs

Obsession
"America First"
Obsession
"America First"

As part of his “America First” principles, president Donald Trump and the steel industry figures he has brought into his administration, including commerce secretary Wilbur Ross, are planning to overrule virtually his entire cabinet to impose 20% tariffs on steel imports, Axios reports. They plan to cite “national security” concerns.

Aside from angering US allies and undermining global trade norms, the first victims of such a policy are likely to be American workers who make things with steel.

Here are the simple economics: There are 60,000 US workers employed in the steel and iron-working industry. More than 900,000 American workers make cars and car parts out of that steel. While tariffs will be a boon to the domestic steel industry, driving up prices, those same price increases will make using that steel more expensive, especially in a competitive global market. Driving up prices of raw materials is a good incentive to move manufacturing overseas.

We even have an object lesson: In 2002, president George W. Bush imposed tariffs on steel imports for much the same reason as Trump—combatting cheap imports from other countries—but ended them when the World Trade Organization ruled them illegal. Over the 18 months that the tariffs were imposed, a spike in steel prices put 200,000 workers out of their jobs, according to a study (pdf) paid for by companies who buy steel. Some of the states with concentrated job losses were those that were key to Trump’s victory in 2016, including Pennsylvania, Ohio, Michigan and Florida.

It’s true that the steel industry has suffered in the US and Europe thanks in part to state-backed firms in China dumping cheap steel on the international market. But unilateral tariffs don’t promise a simple solution, since the US bought less than 2% of China’s steel exports in 2015, and less than 1% last year, a result of 20 trade remedies—rules that limit unfair sales—including four that went into effect last December after court wins against China by the Obama administration. Most US steel imports come from Brazil, Canada and South Korea.

The policy-making process on steel appears seems similar to the one that resulted in restrictions on travel to Cuba. In that case, as with steel, most officials argued that the US would be better served by normalization but were overruled by a handful of White House advisers.

Other policies might do a better job of fixing the US steel industry. A confusing thicket of regulations, for example, means that companies melting down raw steel imported from abroad can sell their finished product under rules that privilege American manufacturers, while those that use more modern technology to heat and press raw steel from abroad don’t get the same preferential treatment.

This is the challenge of industrial policy: It’s very hard to intervene in one sector of the economy without creating unintended consequences in another. The steel industry may see gains from higher prices, but workers up the value chain will suffer. When Bush’s tariffs went into place, Ford and GM challenged him in court. We’re likely to see the same scenario this time around, so expect to see a clash of Donald Trump versus America’s carmakers.

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