How big a deal are the tariffs that Trump formally announced on Thursday? Pretty big, I fear.
If you were thinking of importing some steel or aluminum from the European Union, Canada, or Mexico, you’d better act quickly. As of midnight tonight, imports on these metals from those places will face tariffs of 25 and 10 percent, respectively.
The tariffs will bump up overall prices only a tiny bit, too little for anyone to distinguish from all the other determinants of inflation. It should also help boost capacity in U.S. steel production. But it will hurt the many more American producers and employees for whom these metals are inputs. Added to these effects will be the higher costs of other imports, as countries hit by Trump’s tariffs are already outlining retaliatory measures.
But what worries me more than the tariffs is the shift from the Trump administration’s shift from bark to bite. Up until now, most of Trump’s rhetoric on trade has been just that: bloviation without action. Given my well-honed skepticism about this administration’s ability to genuinely help those workers hurt by trade, this shift from bloviation to actionable policy is more troubling than reassuring.
To understand why the tariffs going into effect at midnight may not be that big a deal as what could come later, it’s helpful to go through a few economic facts first.
- Steel and aluminum comprise less than two percent of our imports
- While the prices of these metals will climb more noticeably, to get to the overall price effect, we must consider both the weight of these products in our price measures and the fact that only part of the price increase will get passed forward to purchasers. Goldman Sachs researchers ran the numbers and estimated that the steel tariffs will raise prices on steel by around 0.03 percentage points (3 one-hundredths of a percent); the impact of the aluminum tariffs will be much smaller.
- I do worry a bit more about this fact: less than 200,000 domestic workers produce these metals here in the U.S. But more than 6 million work in industries that use them as inputs. It’s possible that we will see a sharper bite from the tariffs and more direct job displacements in these input industries.
But to really wrap your head around potential impacts, you have to consider a slew of knock-on effects. While we don’t yet know the magnitude of retaliation by our trading partners, we do know the form they will take: countervailing tariffs on stuff we import. After all, if I were a European trade minister, I’d be seriously pissed off right about now.
That said, it is notable that relative to other advanced economies, the U.S. is pretty insulated against foreign tariffs. We import about 15 percent of GDP, compared to 40 percent for Mexico, 33 percent for Canada, and almost 40 percent for Germany. Thus, here again I don’t expect we’d be able to parse out the price effects from retaliatory tariffs on overall price movements, though they’ll be in there.
Other knock-on effects could be the failure to renegotiate NAFTA and a lot more trade conflict with China. There are, for example, real problems with NAFTA that Trump’s trade representative, Robert Lighthizer, is trying to fix (e.g., the broken, inequitable dispute settlement process). We shouldn’t assume that any such renegotiations are without merit. But Thursday’s actions by Trump could complicate a resolution.
But as noted above, what I find most concerning is the prospect of Trumpian trade policy unleashed. Team Trump is trying to solve the right problem--helping people and places hurt by trade--with the wrong solution, one on which Trump is now likely to double and triple down. Trump lives for this sort of fight, and I can easily see him dialing up the disruption to no good end from the perspective of workers who need the help.
This is a potentially costly loss. I’ve never turned a blind eye to the downsides of global trade. I have long argued that not only is the benign view that trade is all upside wrong—there are people and places here who’ve been lastingly hurt by our persistent trade deficits in manufactured goods—but that the complacency of elites paved the way for a faux populist like Trump. History is clear on this point: a reliable way to fuel nationalistic, insular politics of the type exemplified by these tariffs is to ignore the downsides of disruptive economic change.
All of which is to say I don’t have a knee jerk, negative response to interventions in this space that many of my colleagues immediately label as crass, destructive protectionism.
It’s just that these tariffs and their phony national security rationale won’t come close to helping most workers displaced by imbalanced trade. They won’t lead to investments in new, potentially competitive industries, like green battery production or other renewable technologies. They won’t create significant job opportunities in places that have been left behind, even at our current low unemployment . They won’t provide the apprenticeship, earn-while-you-learn program needed to train a displaced coal miner to be an MRI technician. They won’t roll back the wasteful, regressive tax cuts that robbed the Treasury of the resources to invest in public goods, from infrastructure to human capital.
The moment is thus both disappointing and ironic. The good news is that we finally have an administration willing to try new and different ways to help those hurt by trade. The bad news is that it’s the Trump administration, led by a president that knows a lot about speaking directly to what ails working class Americans, but nothing about what to do to really help them.