Trump's tariffs imperil the global economy and distract from real issues with China

APTOPIX Trump Trade
A welder fabricates a steel structure at an iron works facility in Ottawa, Ontario, Monday, March 5, 2018. President Donald Trump’s plan to impose stiff tariffs on imported steel and aluminum would be ruinous for the world economy, Moodys economist Mark Zandi argues.

President Trump appears committed to taking the global economy down the rabbit hole.

That’s what he is doing by signing off on large tariffs on imports of steel and aluminum. It’s as if he and some of his advisors had skimmed an economics textbook on trade, and decided to do the opposite of what the book said.

The firestorm in Washington, in the business community, on Wall Street, and across global capitals was immediate. The president’s key economic adviser ostensibly quit in protest.

The president argues that the tariffs are necessary, in part, for national security. That is, steel and aluminum are so critical for our defense that we must produce more of it at home. This is a specious argument. Our military uses very little of the steel and aluminum we currently produce, and the biggest overseas sources are our two strongest allies, Canada and the European Union. South Korea, Mexico, and Brazil – hardly enemies of the U.S. – are also key suppliers.

Trump in his tweeting has linked the steel and aluminum tariffs to re-negotiation of the North American Free Trade Agreement with Canada and Mexico. He suggested that there would be no tariffs on steel and aluminum from these countries if they relented to our terms on NAFTA.

What the president wants to change in the NAFTA agreement is very small potatoes – most important being how much of a vehicle is actually produced in the U.S. – and hardly worth the risk of causing the agreement to fall apart. Ham-handed use of steel and aluminum tariffs to gain leverage in these negotiations is like using a sledge hammer to crack an egg.

The president has also justified the tariffs arguing that the U.S. runs a big trade deficit and it’s because we are letting our trading partners cheat us. We do have a deficit in trade, equal to about 3 percent of our GDP, but that is about the same size the deficit has been for nearly two decades.

Some years it is bigger, such as now, but that’s because our economy is strong and we are able to buy more things, including imported goods that we like. Other years it has been smaller, such as during the Great Recession, because we couldn’t afford to buy things. A trade deficit isn’t necessarily a sign of economic weakness. In our case in recent years it has been a sign of strength.

With regard to being cheated by our partners, yes, there are clear cases we must respond to. These concerns are almost exclusively with China, with whom we run our largest trade deficit. However, steel and aluminum imports from China are de minimis, and China is quickly downsizing those industries, knowing they will not be a source of growth and jobs in the future.

Picking a fight over steel and aluminum distracts attention from the real battleground with China: intellectual property rights, including in high-technology and financial services, movies and music. We are the very best in the world at these activities, and we run a large trade surplus in them. They are also responsible for many of our jobs, and much of our income and wealth.

We need to make sure the Chinese play fair, but not with tariffs on steel and aluminum. We need to keep challenging them through the rules and processes established over the decades. We worked hard to form global institutions such as the World Trade Organization to enforce the rule of law. We knew it would be long, hard work to get everyone to play by the rules. China clearly isn’t there yet, but it has made progress, and fighting over steel and aluminum tariffs is a big step backward.

While the steel and aluminum industries and their workers have cheered, the tariffs are not likely to save them for very long. It is simply cheaper to produce these metals in other places, and those cost advantages will ultimately prevail. The workers will also lose out to more efficient ways of production. These industries have been shedding workers for decades, mostly because of inexorable productivity gains.

Meanwhile, the tariffs will hurt U.S. industries and workers that use now costlier steel and aluminum. And they will suffer as global competitors get cheaper steel and aluminum, allowing them to lower their prices and be more competitive.

Steel and aluminum tariffs will cost American jobs. How many depends on how this all plays out. Will the world simply pay the higher tariffs and not respond? And if countries respond with their own tariffs, what will the president do? A tit-for-tat trade conflict or trade war that costs hundreds of thousands or even millions of jobs seems possible.

As Trump often tweets, VERY BAD!