October 9, 2019 at 5:00 am ET
Looking back at the past year and a half of the trade war, which side has the stronger case, Team Tariff or Team Trade?
The trade war began when President Donald Trump imposed 25 percent tariffs on steel imports in March 2018 under Section 232 of the Trade Expansion Act of 1962, ostensibly to protect national security.
The administration assured the country that the steel industry and the broader economy would prosper as a result. Peter Navarro, a White House trade and manufacturing policy adviser, pressed the point in a July 25, 2018, op-ed in the St. Louis Post-Dispatch, writing that “critics of the Trump tariffs continue to insist that such tariffs will ultimately be self-defeating. They warn that the Trump tariffs are simply ‘taxes’ that will raise the prices of ‘downstream’ goods like autos … and ultimately cost more jobs than they create.”
Based on Mr. Navarro’s own criteria, it should surprise no one that the critics have the upper hand.
Economists long have understood that when a country imposes tariffs, it always lowers its own economic welfare, which means reducing the overall standards of living in a society. For example, the United States produces more than 70 percent of the steel it uses, and imports the rest. Tariffs raise the price for all steel in the country. Steel mills benefit from higher prices on the 70-plus percent of the market they serve, but consumers pay that higher cost on 100 percent of consumption. Costs are greater than benefits, so economic welfare declines.
Even though steel mills are supposed to be doing well under the tariff regime, things seem not to be going so smoothly. U.S. Steel Corp. announced in June it would shut down blast furnaces in Gary, Ind., and Detroit because of “decreasing steel prices and softening end market demand.” In July, NLMK Pennsylvania laid off at least 80 workers. Tariffs have made it difficult for NLMK to obtain enough slabs to keep its rolling mill operating at normal capacity.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, has calculated that costs to consumers amount to $900,000 for each job that may have been created as a result of the tariffs. Those are some pricey jobs, and that expense reflects only a small portion of the tariffs’ cost to the broader economy.
This is because steel production is quite a small industry. In 2015 there were at most 140,000 steel mill workers. They produced economic value added of $36 billion, which amounted to 0.2 percent of GDP. Downstream manufacturers that use steel as an input are much larger. They employed 6.5 million people and added over $1 trillion to the economy (5.8 percent of GDP). So steel users employed 46 times more people and added 29 times more value to the economy than steel mills.
Import restrictions have given the United States some of the highest steel prices in the world. A Sept. 23 report by SteelBenchmarker shows the U.S. price for hot-rolled steel to be $629 per metric ton, 32 percent higher than the “world export price.” It’s even 23 percent higher than in Western Europe. Note that the EU generally is a higher-cost economy than the United States.
Now the job losses caused by steel protectionism come into focus. Artificially high steel prices lead to declining competitiveness for downstream manufacturers that use steel as an input. Those firms can find it impossible to compete effectively against products imported from countries that have access to world-price steel. Import competition from manufactured goods easily can lead to more American workers being laid off than the entire number employed in steel mills. Steel import restrictions imposed by President George W. Bush in 2002 were shown to have led to the loss of more than 200,000 jobs. We’re headed down that path again.
The bad news is that the Trump administration appears set to expand the trade war by imposing even more tariffs. The good news is that Congress has the ability to reverse this policy. Members of both chambers have introduced bills that would roll back existing tariffs and make it more difficult for future tariffs to be imposed under the guise of protecting national security. Senate Finance Committee Chairman Chuck Grassley has stated his intention to act on the issue this fall.
Article I, Section 8 of the Constitution gives Congress the authority “To regulate Commerce with foreign Nations.” Members of Congress have taken an oath to “support and defend the Constitution.” They should do so by voting to enhance liberty and enable American citizens once again to do business freely with overseas buyers and sellers.
Critics of the administration’s tariffs are right, and the words chosen by Mr. Navarro have proven unintentionally prophetic. “Tariffs” are “self-defeating” “taxes” that “cost more jobs than they create.” Tariffs on steel and the other trade-war products have not resulted in prosperity, not even for the steel industry. The administration’s trade war has failed; Congress should end it.
Dan Pearson, a former chairman of the U.S. International Trade Commission, is a trade policy fellow at Americans for Prosperity.
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