On Friday, the stock market continued its steep drop over the course of the last week in the aftermath of President Trump’s announcement that he would seek a 25% tariff on steel and a 10% tariff on aluminum. Since late January, the Dow Jones Industrial Average is down over 2,000 points. That makes sense, considering that according to the BBC, “Canada and the EU said they would bring forward their own countermeasures to the steep new tariffs. Mexico, China and Brazil have also said they are weighing up retaliatory steps.”
Trump laid out the intellectual groundwork for his tariff policy. Suffice it to say, it makes zero sense. The 18th century called and it wants its mercantilism back. Here’s what Trump tweeted:
Trade wars are not good, and they are not easy to “win.” In fact, you cannot win a trade war if the purpose of the trade war is to expand your economy. That’s because you are artificially boosting your consumer costs, and shifting costs onto industries that are competitive from industries that aren’t. You might be able to do less damage to your own economy than to a rival’s economy, but you’re still damaging your economy.
Trade deficits also have nothing to do with economic health. You run a trade deficit with your grocery store. You do not help your personal economics by shopping at a more expensive grocery store.
As Thomas Sowell writes:
In general, international deficits and surpluses have had virtually no correlation with the performance of most nations’ economies. Germany and France have had international trade surpluses while their unemployment rates were in double digits. Japan’s postwar rise to economic prominence on the world stage included years when it ran deficits, as well as years when it ran surpluses. The United States was the biggest debtor nation in the world during its rise to industrial supremacy, became a creditor as a result of lending money to its European allies during the First World War, and has been both a debtor and a creditor at various times since. Through it all, the American standard of living has remained the highest in the world, unaffected by whether it was a creditor or a debtor nation.
Then there’s Trump’s take on the steel industry. Again, this is ridiculous. As I wrote yesterday:
In 2016, the steel industry boomed thanks to dramatically increased car sales; Nucor, the nation’s leading steel manufacturer, did $16 billion in sales that year. And last year, it’s net earnings increased 65%. The average salary at the company is $80,000; most job loss has occurred thanks to technological advances, not thanks to foreign trade. Nucor’s stock price in 2000 was around $12; today it’s $65. US Steel boomed in 2017; in Q4 of 2016, net earnings were $47 million, but by Q4 of 2017, net earnings were $136 million. Steel Dynamics showed an operating income of $1.1 billion. American production of raw steel has been more or less steady since approximately 1980. As CATO Institute trade lawyer Scott Lincicome points out, U.S. producers control 70% of the steel market, U.S. steel production rose 5% last year, there are already 160 duties on steel imports, China ranks 11th in steel importation into the United States, we have no defense need for tariffs to preserve the steel industry.
Reciprocal taxes are also idiotic. That’s because, again, raising your own prices does not make your economy more competitive.
Jobs will be lost. The economy will get hurt. And Trump’s message is simply ignorant. Republicans have been counting on a strong economy to support his re-election efforts and GOP chances in 2018. If Trump insists on a trade war, that strong economy could quickly fade, along with Republican hopes for future governing power.
