Trade Wars Are Bad, Nobody Wins

Tariffs on imported steel and aluminum are unlikely to have a major direct impact on U.S. economic growth. However, President Trump’s decision last week has significantly raised the risk level for the U.S. and global economy.

Scott Brown
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Economists disagree on a lot of things, but there’s a lot more that we do agree on – for example, the idea of comparative advantage and the benefits from trade. There is an overwhelming consensus that protectionism has a negative impact on economic growth.

The 25% tariff on imported steel and 10% tariff on imported aluminum will raise costs for U.S. firms – and there are lot more people employed by firms that use steel and aluminum than employed by the firms that produce the stuff. China, which has already been ramping down its capacity in steel production, may not care much, although Chinese leaders have threatened in the past to retaliate if Trump proposed trade barriers against their country, and will likely want to send a message back to the White House. More importantly, the tariffs apply to all countries, and will be felt significantly by our key trading allies.

Already, retaliatory efforts have begun. The European Union is preparing to impose tariffs on Harley-Davidson motorbikes, bourbon whiskey, and Levi’s jeans in response to Trump’s planned tariffs. Canada’s Foreign Minister Chrystia Freeland said that “should restrictions be imposed in Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interest and workers.”

Remember, on day 100 of the Trump administration, the president came close to pulling the U.S. out of NAFTA on a whim, but was persuaded not to at the last minute. Reports suggest that the White House was in turmoil ahead of the announcement of steel and aluminum tariffs, with staff uncertain whether the announcement would even be made.

Financial market participants are justified in their fears that we could see a much broader range of trade conflict. There is no such thing as U.S. manufacturing. Our firms get raw materials, parts, and supplies from around the world. Over the last year, many of these firms have worked, at some cost, to secure alternative supply chains. However, a broader trade war would still take its toll. Supply chain disruptions would add to inflation pressure. The uncertainty may, in fact, already be having a dampening impact on international investment. Trade decisions do not turn on a dime and uncertainty over trade policy could have longer-term effects on U.S. firms’ decisions to expand overseas – and emerging economies are where a lot of global growth is expected to occur over the next 10-20 years.