Trump's First Big Economic Mistake
President Donald Trump’s announcement that he plans to impose tariffs of 25% on steel imports and 10% on imported aluminum is the first major economic policy error of his presidency.
What is the president’s motive? I firmly believe that Mr. Trump’s primary goal as president is to help American workers. Both his tax cut and his regulatory rollback were done for that reason, and workers are benefiting. By contrast, tariffs would not help workers but would cause other problems.
Let’s start with basic economics. A tariff is a tax on imports. That tax is paid by every American who buys the now-more-expensive product. A higher price for one good means less money to buy other goods. This is not a formula for prosperity.
Proponents of tariffs say, “Yes, American consumers have to pay higher prices, but American jobs will be saved.” That is incorrect. The problem isn’t just a tradeoff between American consumers and American workers. Earlier tariffs on steel did, in fact, save jobs in the American steel-producing industry, but destroyed many more American jobs in steel-using industries. Tariffs don’t save American jobs; they merely redistribute where the jobs are lost.
One final comment on the economics of tariffs: In 1850, Frederic Bastiat wrote in his classic essay, “The Law,” that tariffs are a step toward socialism. In his words, “protectionism, socialism, and communism are basically the same plant in three different stages of its growth.” All three call for government to intervene in the marketplace to influence who gains and who loses.
Now let’s look at the geopolitical implications of tariffs. The tariff proposals spooked the stock market. This surprised no one who knows history. In 1930, the stock market was recovering nicely from the 1929 crash until President Herbert Hoover signed the Smoot-Hawley Tariff Act. The stock market plunged, a trade war erupted, and the country slid into the Great Depression. At a minimum, implementing Trump’s tariffs could slow our economy; at worst, with retaliation from abroad, the tariffs could negate all the economic gains that Trump’s other policies have generated.
Some people defend the proposed tariffs on the ground that something needs to be done in response to China’s abuses of trade. Indeed, the Chinese have been terrible global citizens. They cheat. Their government rejects free trade by subsidizing gross overproduction of steel and turning a blind eye to Chinese theft of American intellectual property.
If tariffs are to send a message to China, then Trump should have stipulated that the tariffs would apply only to China. Instead, he adopted a scorched-earth approach, saying that the tariffs would apply to every country. Since Canada exports far more steel to the United States than China, it seems reckless and unfair to impose major pain on our friendly neighbors to the north if our goal is to rap China’s knuckles. More plausible is that the purpose of the tariff threat is to induce Canada to make concessions in the NAFTA negotiations.
Trump seems oblivious to the fact that international trade has had enormous economic benefits for Americans. Yes, some jobs are lost, but the overall increase of prosperity includes the creation of millions of new jobs. From 1945 to 2000, increased trade raised the average household income of Americans by $10,000 per year. In 2015, the Council of Economic Advisers reported that American consumers gain 29% of their purchasing power from trade.
Besides the faulty economics and risky geopolitics of the proposed tariffs, there is a third problematical aspect to Trump’s proposal. The constitution of the United States gives Congress the prerogative “to regulate commerce with foreign nations” (Art. I, Sect. 8, para. 3). No president has constitutional authority to unilaterally impose tariffs. Congress should resist this usurpation of power. And if that fails, the Supreme Court needs to uphold the constitution.
Wouldn’t it be ironic if Trump-appointed associate justice Neil Gorsuch someday provides the decisive vote for the unconstitutionality of a policy instituted by the president who appointed him?
But let’s hope it doesn’t come to that. President Trump misfired on this issue. He should drop his threat of tariffs and find other, more effective and less disruptive ways to boost the fortunes of America’s workers.