President Trump is not letting up on his trade war. Earlier this month, Trump threatened China, as well as U.S. allies Mexico and Canada, with tariffs. A little over a week ago, Trump decided to implement a 25 percent tariff on all steel and aluminum tariffs, which will take effect in mid-March.
I roll my eyes not simply because of how unpleasant tariffs are in economic theory. We have already been down this path. At the beginning of Trump's first term, Trump implemented a 10 percent tariff on aluminum and a 25 percent tariff on steel. In 2017, I criticized Trump's steel and aluminum tariffs, scrutinizing his national security argument vis-à-vis Section 232 while pointing out how poorly they worked out when President George W. Bush implemented similar tariffs in 2002. It turns out I was right.
What was the end result of those steel and aluminum tariffs from Trump's first term? As I detailed last year, less export growth, a lower GDP, the 1,000 steel manufacturing jobs gained caused a reduction in manufacturing employment by 75,000 workers, not to mention more expensive steel and aluminum prices (24 and 31.1 percent, respectively). And guess who paid those higher prices? It was not China, but rather U.S. consumers. Last week, the Cato Institute also highlighted several studies that showed these undesirable effects. Here are some highlights:
- The American Action Forum showed the direct cost of the tariffs ended up being $4.6 billion annually (Lee and Varas, 2022).
- In its 2023 report, the U.S. International Trade Commission calculated that the tariffs caused a) a decline in downstream production of $3.5 billion, and b) that steel and aluminum prices increased an additional 2.4 and 1.6 percent, respectively.
- The Center for Automotive Research found that his tariffs created a deadweight loss of $4.3 billion, and that the few jobs that the tariffs managed to save cost a whopping $635,000 per annum (Schultz et al., 2019).
Trump does not seem to understand the ripple effect this will have in the U.S. economy. As the Council on Foreign Relations (CFR) shows, there are way many more construction workers that use steel, as well as transportation and packing jobs that use aluminum, than the jobs protected by the tariffs. Reason Magazine reminds us that for every job in aluminum manufacturing, there are 177 jobs in downstream aluminum-consuming industries.
Reason Magazine also brings up the point that this will harm the energy sector because nuclear power plants are built with steel, carbon steel forges and aluminum tubular products are commonly used to extract oil and gas, steel makes up 69 percent of a wind turbine's mass, and aluminum accounts for 85 percent of solar power components. You want to know what that will mean? Energy prices are going to increase because of these tariffs.
Right now, Standard and Poor's and the Tax Foundation preliminarily believe that the effects on GDP will be less than 0.1 percent. That might sound like giving Trump a reason to celebrate, but I am not holding my breath. Aside from the lousy history of steel tariffs in this country, there is still concern about how this will affect downstream industries. Standard and Poor's also surmises that the effects will be larger if these tariffs end up triggering trade retaliation, which is certainly plausible given how Canada and Mexico were ready to retaliate with Trump's other tariffs this presidential term.
There are two reasons to believe the effects of the tariffs will be worse this time around. One, the aluminum tariffs were only 10 percent the first time around. Now, it will be 25 percent. The second one is that the administration has made clear that in contrast to the first term, there will be no exemptions this time around. To emphasize this point, these steel and aluminum tariffs from Trump's first term did not help with national security nor did they boost the economy. How many tariffs will it take for the Tariff Man to finally get the hint that tariffs harm American consumers and businesses?
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