The Truth of the Trade War

By James Dail (CMC ’20)

One of President Trump’s main campaign promise was to revive the depleted US manufacturing sector and bring back lost jobs by implementing tariffs. Even today, this is one of the President’s main talking points whenever he goes to a campaign rally in an area that used to have strong employment in its manufacturing sector, such as Pittsburgh. This idea is very popular among his supporters, with 65% of Republicans supporting it, compared with 24% of Democrats and 31% of Independents. However, corporate America has had a very different reaction. Every time the President announced a new tariff on imported goods, the stock market took a plunge. These investors are right to be concerned. While strong quarterly economic growth numbers clearly show that predictions of tariffs crashing the economy are far-fetched, the severity of the a tariff’s effect is entirely dependent upon its size and scope. All tariffs, however,  hinder the economy by limiting what it could do. Furthermore, once tariffs are implemented, there is always the risk of greater escalation to larger tariffs that will put a significant drag on the economy.

One common argument for the implementation of tariffs is that they will act as a sort of subsidy for specific decaying industries, usually manufacturing. The thought process is that they will give the remaining workers in the manufacturing industry higher wages and will revive manufacturing employment through the return of jobs that had been sent off-shore. Proponents argue that this will occur because implementing tariffs will increase the demand for goods that are produced domestically, and that fact is true. The problem is that the tariffs have other adverse effects that harm workers in other parts of the manufacturing value chain, and these effects can spill over into other industries as well.

Take the President’s 25% tariff on imported steel for example. It will price foreign produced steel at a higher rate than domestically produced steel. This means that, though Americans will have a greater incentive to buy domestic steel, they will also have to pay more to purchase any kind of steel. Furthermore, these price increases will be reflected in any product that is made with steel, like cars. The increased cost to produce a car is inevitably passed onto the consumer. At the same time, firms will take in fewer profits because of lower demand and higher costs. Any wage increase that US steel workers can expect to see from the tariffs will be negated because they have to pay more for goods they need to purchase. If this process occurs in small quantities across very specific industries, then these effects are hard to notice. Indeed, nothing much has happened in response to the President’s steel tariffs other than a few stock market jitters. However, it is easy to see that economic problems will occur when tariffs become widespread. Once any tariff is implemented between two free-trading nations, the risk of escalation is always present. To continue with the earlier example, if the US places tariffs on steel, then all of our former steel importers will suddenly face lower demand for their goods. This will incentivize foreign governments to raise tariffs on steel, and potentially other industries, so that foreign companies will be able to gain at least some of their lost revenue back. These retaliatory tariffs will severely hurt any US industries that rely heavily on exports, such as farmers, whose profits have declined precipitously since China implemented retaliatory tariffs.

Instead of helping US industry, the President’s actions are harming them through lower profits. His actions are also harming consumers through more expensive goods. Though the limited tariffs in place right now are not much of an impediment to economic growth, the President should refrain from taking any further action o that could amplify the adverse effects tariffs can have on the economy.

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