President Trump has plans to implement a 25 percent steel tariff and 10 percent aluminum tariff. The motive is supposedly to level the playing field. If America has to pay tariffs, then why not make others pay tariffs!? Think again. Economics cannot be handled by fighting fire with fire, especially with shallow minded protectionism. For a man who has boasted endlessly about his business credentials and billion dollar bank account, we need to rely on the “dismal science” to show what really happens when neophytes try to take over monetary matters.
The basic of idea of tariffs is this: When countries import or export goods and services, there is a baseline cost for exchange. China wants America’s coal, so it gets exported. When this export reaches the consumer nation, a fee (tariff) is charged upon the good that has been imported. An initial cost of business so to speak. Doesn’t sound too bad yet, considering that not only does the consumer get their desired good, but the nation also gets an additional hunk of change for the mere act of consuming a product that could have been supplied domestically. Conversely, some problems can arise.
First, the suppliers who are having to pay the additional cost of the tariff will not be happy because it disrupts their profit margins. Instead of merely considering all the costs that went into production before tariff costs, they now have to be added into the equation. When the name of the game is money, any dollar that can be cut from spending will be cut. Even if the supply of a good is plentiful and prices are low, the tariff remains. As a result, suppliers are left with an excess product because they cannot make enough money on their investment. Trump has showed he’s not in the business of making deals if doesn’t mean more “Made in the USA” stamps. This logic may be good on other areas of concern, but economics is simply not a zero sum game.
Second, suppliers will find business elsewhere to make their profits. Trading is not like marriage, but like a divorce. When it does happen, one party will find someone who needs them, one way or another. The U.S. imported just shy of $1 billion in Chinese steel in 2017, or 3.35 percent of the United States’ nearly $30 billion annual steel import market, according to Commerce Department data. There are many other steel suppliers for whom the United States buys from (EU, Canada, etc.), but with a tariff that may have “many exceptions,” why even have a tariff in the first place? Charging an additional 25 percent trading cost toward someone who contributes a meager 3.35 percent of the total market appears to be a pointless effort.
Third, counter tariffs can be implemented. If tariffs are the game Trump wants to play, then China and The European Union are more than willing to go on the offensive with their own tariffs. This can very well result in the some of the problems mentioned earlier.
These are only a few problems that could come about from Trump’s tariff plan. The longing for American-made goods has no signs of slowing down, even at the cost of buying the same product from another country for a better deal. Needless to say, we should leave economics for the economists.