This morning, Donald Trump was expressing the detailed economic plan of someone who never, ever, not once in his life, bothered to understand economics—no matter where he went to school.
No. It’s not easy. It may be possible, but the cost could be extreme. It almost always is. Because no one really wins a trade war. Trade is the opposite of a zero-sum game. Launching into an effort big enough to bring another nation to alter policies is hard to do without being willing to subject consumers to higher prices and risking thousands of jobs.
In other words: Auto manufacturers can’t switch to mobster-sourced concrete when steel becomes too dear.
Trade wars are also made more dangerous by Trump’s statements that he wants to make all negotiations one on one rather than multilateral. Blocking access to American markets on products believed to be priced too low can simply result in the price going lower to open up sales elsewhere. In the case of something like steel or aluminum, that might hurt margins in China—but not without lowering exports for everyone else, the United States included.
Fighting a trade war effectively can only be done with allies. Trump hasn’t just pushed away multi-lateral trade agreements, he’s failed to build economic alliances that could turn a one-way snit into effective pressure. Trump’s been around the world saying “America First” while everyone else has been looking at their neighbors and allies to build new partnerships and agreements.
Now Trump is threatening to turn off the music … and America may be without a chair.
Except … we do have steel. One that was arguably given solid assistance in 2002, when the US applied stiff, and in many ways effective, tariffs on imported steel. Those tariffs were issued on specific products for a defined three year period. They were issued with the support of allies, including Mexico and Canada. They provided exemptions to both allies and developing nations. And, importantly, they were issued at the same time as a set of similar restrictions by the European Union. As a result, the tariffs were broadly effective in giving the industry “breathing room” during a recession, when a sudden drop in demand was threatening to devastate an industry that had been heavily investing in new capacity during a long period of growth.
It may be difficult to think of anything done during the Bush administration as “smart,” and there was certainly opposition to the imposition of tariffs from the free-trade faction of the Republican Party, but those tariffs show how they can be applied to very specific situations. Just prior to the tariffs, a number of US steel firms had either moved into Chapter 11 or folded completely in the face of the 2001 recession. The collapses threatened to cascade through the industry. The coordinated, international action may not have saved the industry, but it certainly prevented a lot of chaos and allowed the industry to consolidate in a more organized fashion while also allowing the steel workers union to negotiate a new contract that better protected pensions from the dangers of bankrupt companies.
In short, tariffs can be effective economic relief, but only if they’re administered carefully for a defined period, a specific purpose, and with the knowledge that they will still result in higher prices downstream. They represent an agreement to split the cost of an industry in trouble across everyone who uses a product for the express purpose of saving domestic capacity.
What the tariffs in 2002 didn’t do was save the industry in the sense of returning steel production to where it was in the 1970s or 1980s. They preserved the industry against collapse. They didn’t boost it back to world dominance.
And now, despite what Trump says, the steel industry at the moment is not in “bad shape.” Though total production is down about 12 percent from levels before the 2008 Great Recession, the US industry is currently producing at about 75 percent of maximum capacity and providing about half the steel used in the United States, as well as exporting $6.8 billion of steel in 2017—almost all of which went to NAFTA partners Canada and Mexico. It’s not even close to the kind of widespread collapse that loomed in 2002.
The history of tariffs isn’t as simple as tariffs=bad or tariffs=good. Instead, it’s that tariffs have a serious impact, generate complex repercussions, and have to be applied in a studied manner with careful skill and the cooperation of allies if they’re to be effective. The complexity of tariffs is such that, 90 years later, the results of the most famous set of tariffs are still being debated.
But even if those tariffs weren’t the principle cause of a depression that was already slipping into place, they fed a fire that spread around the planet. The history of those tariffs shows that what starts as an effort to protect a specific industry, can easily spiral into an all-encompassing clamp-down that throws the brakes on economies everywhere.
Trump has already demonstrated exactly how a tariff can be done “wrong.” His earlier tariff against components of solar panels was imposed in the name of two companies that were already out of business, and has mostly served only to increase cost of parts to companies in the United States that manufactured completed panels and drive up the cost of home solar to consumers (which may well have been the intent). And despite the narrow focus of the original claims against China, Trump’s tariff was applied universally.
Expectations are that the steel and aluminum tariffs will be similar … though the fact that even the commerce secretary doesn’t know shows just how little planning and thought has gone into this move.
Trump likes to approach trade deals one on one, but when he makes tariffs, they are one against everyone—neither of which makes sense. And it’s already bringing a response.
Trump is simultaneously claiming “the economy is strong” and threatening to start a trade war. One of these things will not survive the other.