The Economy Will Suffer With Trump's Import Tariffs?

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Economist's are dead set against raising import tariffs - and with few exceptions are publicly positioned against President Trump's new tariffs on foreign imports of steel and aluminum.

According to Rasmussen Reports:

Most Americans fear that President Trump's new tariffs on steel and aluminum imports will trigger a trade war and think it's better for the federal government to mind its own business.

Economists are arguing it will cost USA jobs. Some are worried about a global trade war. Others warn of a deep global recession.

1) Fears of global recession

In my youth, it was taught one of the major causes of the Great Depression was the increase in global tariffs - and that increased tariffs caused recessions. This position now is out of favor. From Wikipedia:

Many economists hold the opinion that the tariff act did not greatly worsen the great depression:

Milton Friedman also held the opinion that the Smoot-Hawley tariff of 1930 did not cause the Great Depression. Douglas A. Irwin writes : "most economists, both liberal and conservative, doubt that Smoot Hawley played much of a role in the subsequent contraction."[59]

William Bernstein writes "most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars "because trade was only nine percent of global output, not enough to account for the seventeen percent drop in GDP following the Crash. He thinks the damage done could not possibly have exceeded 2 percent of world GDP and tariff "didn't even significantly deepen the Great Depression."(A Splendid Exchange: How Trade Shaped the World)

Peter Temin, explains a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He notes that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concludes that contrary the popular argument, contractionary effect of the tariff was small. (Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass)[60]

Nobel laureate Maurice Allais, thinks that tariff was rather helpful in the face of deregulation of competition in the global labor market and excessively loose credit prior to the Crash which, according to him, caused the crisis Financial and banking sectors. He notes higher trade barriers were partly a means to protect domestic demand from deflation and external disturbances. He obserses domestic production in the major industrialized countries fell faster than international trade contracted; if contraction of foreign trade had been the cause of the Depression, he argues, the opposite should have occurred. So, the decline in trade between 1929 and 1933 was a consequence of the Depression, not a cause. Most of the trade contraction took place between January 1930 and July 1932, before the introduction of the majority of protectionist measures, excepting limited American measures applied in the summer of 1930. It was the collapse of international liquidity that caused of the contraction of trade.

Source: Wikipedia by James 4 - Own work, CC BY-SA 4.0Link

2) Global Trade War

Would ANY net exporting country start a trade war? Sure, exporters likely would respond with a targeted tariff on some product - but nothing so major as to trigger a round of tit-for-tat. Exporting countries need their exports to keep their economy optimized. It is a "no-win scenario" to punish a customer. In general, the USA has a trade-weighted average import tariff of 2%, whilst the average WTO member tariff in 2013 was 9%. I reject doomsday predictions of dire impacts UNLESS a massive trade war erupts. As a metric, imports LOWER GDP as imports are subtracted from GDP. It is hard to envision any net impact to the economy regardless of the quantitative mumbo-jumbo produced.

3) Jobs, Jobs, Jobs

Higher import duties obviously raise costs in the manufacturing process and ultimately to consumers. It is not as though you can snap your fingure and create a domestic steel mill to fill the gap so the initial affect would be higher prices. Any tariff impacts the current equilibrium negatively. I have read numbers all over the map of employment impacts due to steel and aluminum tariffs. Consider that the oil and natural gas industries employ around 10 million - and contributes 8% of GDP. All of metals production employs a tiny fraction of one million workers and contributes 0.3% of GDP. Oil prices go up and down like a yo-yo.

4) Strategic

In the 1970s, there were no manufacturers of small nuclear class valves in the USA. I had my own war with Admiral Rickover at Velan Engineering in Montreal - as he needed these valves for the nuclear navy. During this period, I witnessed other components and products not built in the USA anymore - the usual reason was that the cost of meeting environmental laws made USA production too costly.

It is not necessary for any country to produce 100% of what it needs - as imports keeps pricing pressures on products to benefit consumers.

5) Driving Competitors Out of Business

All things being equal, true free trade allows competitive forces to regulate market prices. But trade needs to be monitored and remedies implemented when domestic industries are not competitive. Part of the problem is that many / most foreign products enter the USA markets sans-tax - whilst USA manufactured products has paid local, state and federal taxes. Environmental laws that foreign products do not need to meet is another factor. But a more subversive factor is the game of market share - where one produces a product at no profit (or at a loss) to increase market share. The end result many times drives the competitor out of business. It seems fair when Amazon does it to competitors. Is it fair when Wuhan Iron and Steel Corporation does it to US Steel Corp?


Bottom Line

As I have written many times in the past, you cannot just let free trade operate without monitoring - and taking necessary remedial action to ensure domestic operators have a level playing field. Producing things is a strategic asset - just like people. A country cannot allow another country to kill either its citizens or its means of production.

Other Economic News this Week:

The Econintersect Economic Index for March 2018 marginally improved but remains in territory associated with modest economic growth. Note that this index has been in a general down trend since July 2017. We remain concerned about the HISTORICALLY HIGH elevated spending to income ratios which paints a picture of a consumer spending all of its income - with little room for additional spending.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

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