Tariffs are a bad idea. Yes, we’ve made that case in this space before.
But tariffs have emerged as the major economic issue of these times. So it bears repeating: they are a really bad idea.
Deploying them to launch a trade war is an even worse idea. Yet U.S. President Donald Trump has decided to go down that warpath. And, unfortunately, the United States Congress appears powerless to do anything about it.
For a time it looked as though Trump had come at least partially to his senses and was prepared to exempt Canada, Mexico, and the European Union from the steep tariffs he sought to impose on steel and aluminum imports. But when renegotiations of the North American Free Trade Agreement stalled or didn’t proceed to his liking, Trump withdrew that exemption. The timing might only be a coincidence but that shift in direction occurred just as he was about to meet with leaders of the major western economies — the Group of Seven — in Quebec.
Why a U.S. president would want to provoke a trade war with his country’s longstanding allies is one of the great mysteries of the 21st century so far. Unravelling that will no doubt employ generations of future historians and economists. The latter are already by a large margin condemning the trade war as utter folly.
Now, one consequence of the tariffs, the 25 percent levy on steel at least, has been, or appears to have been, the restarting of steel furnaces in Illinois and South Carolina. As a result, several hundred steel workers are back on the job. U.S. Steel Corporation in Granite City, Illinois, returned 500 employees to work earlier this year and will put 300 more back to work when a second blast furnace restarts in October, according to a Yahoo News report.
On the surface, that looks a big victory for Trump’s tariffs. But all indications are that it will be Pyrrhic victory. For just as King Pyrrhus of Epirus defeated the Romans, Trump can prevail in a trade war — but only with many casualties and a lot of collateral damage.
One immediate consequence is going to be higher prices for aluminum. That means it’s going to cost more for aluminum service bodies built in the U.S. because the major sources of those grades of aluminum are from Canada and will be subject to a 10 percent tariff. Manufacturers of those bodies will pass costs along to buyers. It’s Economics 101 that any time you raise the price of something, demand for it falls.
Fortunately, demand for service bodies has been robust. So the tariffs aren’t likely to drop the bottom out of the market. But they will slow growth.
In fact, economists estimate that Trump’s tariff will stifle growth in the U.S. gross domestic product by two to three percent. That’s not huge but it will about cancel out the average annual growth of a mature industrialized economy.
And because the U.S. economy is still the world’s largest and has such a huge internal market, it can limp along — at least until secondary effects of the tariffs kick in to disrupt the global supply chains.
In the meantime, longtime allies of the U.S. face a more grim immediate future.
In 2016, trade accounted for 64 percent of Canada’s gross domestic product compared to 27 percent for the U.S., according to figures from the World Bank Group.
Exports accounted for 31 percent of Canada’s GDP, but only 11.9 percent of U.S. GDP. Meanwhile, about 76.25 percent of Canada’s exports in 2016 were to the U.S. But those exports only translated into 12.6 percent of imports into the U.S. that year.
It’s clear which partner is more dependent on trade.
European countries aren’t in nearly such a precarious position. Germany, for example, only sends 8.9 percent of its exports to the U.S.
Mexico, though, is in a similar predicament as Canada, with 81 percent of Mexican exports bound for the U.S. Nearly half, 46.5 percent, of Mexican imports come from the U.S. Overall, trade accounts for 78 percent of Mexico’s GDP.
An unintended consequence of a trade war would be to squeeze the GDP of Mexico and result in even more Mexicans attempting to seek economic refuge in the U.S.
Retaliatory tariffs certainly aren’t going to help the fortunes of Mexico or Canada. For the minuscule pain they inflict on the U.S., those measures will harm the retaliators more.
Unfortunately, that’s where things are headed.
— Keith Norbury