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Why A Trade War Is Actually Bad

Trump Just Tweeted They’re “Good And Easy To Win”

The President promises steep across the board tariffs on steel and aluminum imports will be in place by next week: 25% on steel, 10% on aluminum.

But why the uproar? Almost all U.S. Presidents have taken action against out-and-out dumping of imported goods. Dumping is where a company sells something below cost into a foreign country for a period of time, sometimes with government support. The idea being domestic producers in that country won’t be able to compete, so they’ll go out of business.

The Obama administration slapped steel dumping sanctions on China 2 years ago, and they’ve been effective, reducing China’s share of the U.S. market dramatically, to about 2%, down about 30% from 2016 levels.

Perhaps the most famous anti-dumping tariffs were those President Reagan imposed against Japan during the 1980’s: first on cars and motorcycles (which led to much higher prices in the U.S.), then on semiconductors.

So why is this so different?:

Today’s China is not 80’s Japan. Japan needed the U.S. It knew it would eventually have to fall into line because it had to be able to sell stuff here. China has other outlets. Global trade is more ubiquitous.

Also, as we mentioned above, China’s already been hit by U.S. anti-dumping tariffs on steel. Now, most of America’s steel imports come from Canada, Brazil, and Europe.

In the past, tariffs were targeted specifically at countries that were badly misbehaving. The New York Times reports Trump says he’d like them to apply to any import, regardless of its origin, and regardless of whether that country has an “unfair” trade deal with the U.S. or not, or is dumping or not. And he vowed to keep the tariffs on “for a long period of time”.

That does actually make some sense: in the past, because tariffs did not apply to all countries equally, they often just shifted the balance of imports. So the U.S. would end up importing almost as much, just from different countries. And since Trump wants to create U.S. jobs, that doesn’t really fit with his vision of how this is going to work.

On the other hand, by applying tariffs equally to everybody, Trump runs the risk of angering some of our closest trading partners who have done nothing wrong.

While tax cuts might leave room to do some tariffs now without much initial impact, retaliation is unpredictable. CNBC asserts higher costs for steel and aluminum will remove 10% of the value of recent tax cuts from corporate America’s balance sheets, at most.

First of all, that underscores how radically huge the Trump/Republican tax cut actually is for corporate America. Secondly, they’re only looking at one side of the equation. Because there’s no way of predicting how forcefully other countries will react. The first thing that’s always targeted: U.S. Agriculture. That’s because farmers and ranchers can’t just sit back for a few years with a warehouse full of soybeans or a pasture full of cattle and wait for this whole thing to work itself out.

Once that’s done, they’ll start looking for the biggest ticket items the U.S. still makes a lot of. Which at this point is pretty much airplanes and iPhones. So not only is Boeing potentially paying a lot more for the steel and aluminum it needs to build planes, it’s also seeing contracts getting cancelled. And China’s one of its biggest customers. No wonder Boeing’s stock plunged nearly triple what the market as a whole did on Trump’s announcement.

Or they’ll look for politically sensitive targets: like Harleys from Paul Ryan’s home state of Wisconsin, or bourbon from Mitch McConnell’s home state of Kentucky.

Finally, there’s the threat of inflation. Higher steel and aluminum prices can lead to higher consumer prices on everything from cars to cans of beer. Even without that, the stock market is already really worried about inflation. And a sustained sell-off could wipe out a lot more wealth.

Interest rates are creeping up to levels we haven’t seen in years. (Higher interest rates mean it costs more to borrow money, which means money is more expensive). Throwing tariffs into the mix, which will absolutely make things more expensive, could freak people out even more, who are already a little freaked out.

Trump’s Even Got The “Origin Story” Wrong

The President announcing his tariffs while invoking a heady time in American economic history: the heyday of U.S. Steel. At a meeting with steel and aluminum industry executives, Trump rhapsodized about the once-powerful giant with roots going back to Andrew Carnegie and J.P. Morgan. You can watch a clip here:

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But U.S. Steel didn’t get killed by “shameful” trade deals. It lost clout because its executives refused to modernize and invest in new technology, secure in the belief that if anything really bad happened, the U.S. government would bail them out. Japanese steelmakers at the time did innovate, and ate their lunch. And sure enough, the Reagan Administration came in and bailed them out, giving them huge tax breaks to help make up the gap in what they were charging for steel vs. what foreign manufacturers were now able to charge.

Only you know what U.S. Steel did with the money? They went out and bought an oil company. And still didn’t modernize. U.S. Steel now has about 1/10th the number of employees it once did.

Written by

Peabody award winning journalist. Streaming media pioneer. Played @ CBGB back in the day. Editor-In-Chief "The Chaos Report"

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