The White House’s Steel Tariffs Decision: Bad, But It Could Have Been Worse
We take the view that without a strong economy, you cannot have strong national security.
– Wilbur Ross, U.S. Secretary of Commerce
Yesterday’s decision by the Trump administration to levy tariffs of 25 and 10 percent on imports of steel and aluminum respectively from Canada, Mexico, and the European Union for reasons of national security is wrongheaded. But there are two ways that things could have been even worse.
First, instead of tariffs the White House could have opted to impose quotas (quantitative limits) on foreign steel and aluminum imports, as it had been floating in recent weeks. For the EU, there was reportedly discussion of a figure equivalent to 90 percent of the bloc’s exports to the U.S. in 2017.
The idea behind tariffs is to artificially inflate the prices of foreign goods, making them uncompetitive with domestic products when they otherwise would be. They create a protective barrier behind which domestic firms can sell their products more easily, given the reduced competition.
There are two big problems with that.
As the foreign competition is eased, over time U.S. steel or aluminum producers lose their incentive to innovate, making their products unattractive to buyers both domestic and foreign. And since steel and aluminum are inputs to things U.S. producers like to export—cars or machinery, for example— those Made in America products will become pricier and less able to compete on global markets.
But as bad as tariffs are, there is reason to be grateful the administration chose this route rather than the alternative one of quotas. Although tariffs raise prices, they do not interfere with the workings of the market. If demand suddenly increased for steel (for example, as a result of a mooted and much needed increase in U.S. infrastructure investment) German or other European steel would still be available to meet the need. It would be more expensive than domestic steel in the U.S., but if demand is strong enough it could still be competitive.
That would not be the case with quotas. If the U.S. saw an uptick in demand for steel, once the Europeans hit their 90 percent quota no more would be available to meet the need. The market would cease to function properly, and both shortages and massive price increases would be the result. The U.S. government, rather than private economic actors, would in effect be determining who gets to buy how much and at what price.
The second silver lining in the tariffs decision is the justification for it provided by U.S. Secretary of Commerce Wilbur Ross: “We take the view that without a strong economy, you cannot have strong national security.” No one should argue with that point. The question is how to go about preserving a strong U.S. economy.
The administration seems to believe that tariffs on allies need to be part of the equation; the truth is that instead of confrontation it is cooperation with allies that is the way to a stronger economy.
The administration seems to believe that tariffs on allies need to be part of the equation; the truth is that instead of confrontation it is cooperation with allies that is the way to a stronger economy. Case in point: the North American Free Trade Agreement (NAFTA), which has been key to ensuring the U.S. remains a platform for automobile production and exports. Or the Transatlantic Trade and Investment Partnership (TTIP) that was being negotiated between the U.S. and the EU during the Obama administration and which would have (and still could, if it were revived) set rules in areas like intellectual property and digital trade that China would have to adapt to.
Still, here the argument is not about ends, but rather about means. Reasonable people can disagree about means if they agree on the ends.
So it is important to keep in mind that Secretary Ross did not say yesterday’s action was aimed at punishing other countries for their unfair trading practices, or that the U.S. wanted to “win” and other countries to “lose,” or that it wanted to oblige foreign companies to invest in the U.S. (if they want to access the U.S. market without having to face the tariffs).
No, Secretary Ross said that national security requires a strong economy.
The administration is right on the objective—but wrong on how to get there.