Saturday , May 26 2018
Home / Jeffrey Frankel's Blog / “Trump Tariffs Will Do Harm, Experts Say”

“Trump Tariffs Will Do Harm, Experts Say”

Summary:
March 9, 2018 — PBS NewsHour asked some of us six questions about the new tariffs.  My responses appear below.  The others’ are at: “Trump’s tariffs will do more harm than good, experts say,” March 8. PBS: Would President Trump’s proposed tariffs on steel and aluminum imports help create more jobs in the United States, as he argues? JF: The import tariffs are likely to create a few jobs specifically in the US firms that make steel and aluminum. The important point, however, is that such positive effects will be far outweighed by negative effects on other sectors.  This is especially true of those manufacturing sectors that use steel and aluminum, such as the auto industry, aircraft, heavy equipment manufacturers, household appliance makers, beer can producers, and so on.  Because the

Topics:
Jeffrey Frankel considers the following as important: , , ,

This could be interesting, too:

Scott Sumner writes Commodities are fungible

John H. Cochrane writes What’s worse than tariffs?

Jeffrey Frankel writes Seven reasons China won’t yield in Trump’s trade war

John H. Cochrane writes Intellectual property

March 9, 2018 — PBS NewsHour asked some of us six questions about the new tariffs.  My responses appear below.  The others’ are at: “Trump’s tariffs will do more harm than good, experts say,” March 8.

PBS: Would President Trump’s proposed tariffs on steel and aluminum imports help create more jobs in the United States, as he argues?

JF: The import tariffs are likely to create a few jobs specifically in the US firms that make steel and aluminum. The important point, however, is that such positive effects will be far outweighed by negative effects on other sectors.  This is especially true of those manufacturing sectors that use steel and aluminum, such as the auto industry, aircraft, heavy equipment manufacturers, household appliance makers, beer can producers, and so on.  Because the sectors like autos use the metals as major inputs to their production process, these industries will be hit by the increase in costs.  Workers in the adversely affected industries vastly outnumber workers in steel and aluminum – by about 80-to-1, according to Econofact.

The net effect is likely to be negative even if there is no loss of US exports.  But there will in addition almost certainly be a loss of exports, and therefore jobs, in other sectors. The most obvious reason is that the countries hit by our tariffs if they go ahead as planned — especially Canada, but also Korea, the European Union, and others — will retaliate with tariffs against our exports.  Agriculture is high on the list of American sectors bound to be hurt by retaliation, but some manufacturing firms are likely to be hit too.

PBS: What impact would the tariffs have on U.S. consumers?

JF: By raising the price of steel and aluminum, the tariffs will raise the price of everything that has steel and aluminum in it, from autos to beverage cans.

PBS: How big of a ripple effect would this have on the global economy? Would other countries retaliate in ways that would have a significant impact on the American economy?

JF: Yes, other countries are very likely to retaliate.  They would be justified in doing so, since our national security excuse for these tariffs is flimsy in the extreme.  (Very little of the steel or aluminum that we use is produced in China.)

If one retaliatory round were the end of it, the negative effects might not be big enough to show up in global GDP — unless this is the shock that pricks a bubble in securities markets.  The greater fear, however, is that this will not be the end of it, that it might even be the start of a steady unraveling of the global trading system that has contributed so much to global prosperity over the last 70 years.

PBS: Trump tweeted recently that winning trade wars is “easy.” Is that really true?

JF: That blithe characterization is one of the most misguided economic pronouncements yet to come out of the White House.  I have an awful suspicion that Trump’s thoughts may run along the following lines:  If we import more from a country than it imports from us, then the elimination of all trade costs them more exports than it costs us. But of course both countries lose in a trade war, and they lose big in a big trade war.  If he thinks this is some sort of macho high-stakes game of “chicken,” where he expects the other side to back down, he should at least give some indication of what specifically he wants other governments to do.  He hasn’t done that, so far as I am aware.

Three more reasons why Trump will not win a trade war: (1) He declared hostilities against virtually all other countries simultaneously, (2) he is violating international legal commitments (which we made voluntarily, to agreements that we ourselves proposed) and (3) upon taking office he quickly burnt up the good will among most of our trading partners that a US president normally gets.

PBS: The president seems to take a zero-sum approach to trade policy. Does that make sense in an increasingly global economy, where U.S. companies rely on an international supply chain to produce and export goods?

JF: The international supply chain whereby we, like every country, depend on inputs of intermediate goods for our production, including for our exports, makes the costs of protectionism very immediate and tangible, perhaps more so than in the past.  Again, barriers against imports of steel hurt the competitiveness of our auto industry.

But the zero-sum approach to trade policy never did make sense.  Adam Smith and David Ricardo showed this “mercantilist” fallacy 200 years ago, when they developed the classic argument for gains from trade. The principle was demonstrated the hard way, in 1930: the US adopted the Smoot-Hawley tariff, other countries responded in kind, and global trade collapsed, which helped put the “Great” in the Great Depression.  Do we really want to repeat that experiment?

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

Leave a Reply

Your email address will not be published. Required fields are marked *