By Jonathan McGeachen
If you hadn’t heard, President Donald Trump recently established tariffs (taxes) on imports of steel and aluminum. 25% and 10% respectively. Media outlets are proclaiming economic peril. I’ve even heard it referred to as “evil” on social media.
Is it weird if I think we’re going to be OK?
I’ve said it before and I’ll say it again: I’m a free trade shill. I think we take our low prices for granted and then gripe about jobs leaving, not realizing the two go hand in hand. It’s easy to point to thousands of jobs lost, it’s hard to point to millions of avocados that are cheaper because Mexico produces them cheaper, or gas that’s cheaper because we can import Canadian oil freely. I think NAFTA is underrated for thousands of little reasons like that. I even suspect the deceased Trans-Pacific Partnership was underrated too. I think protectionism tells consumers they’re too stupid to make their own choices, and the government needs to help them, and then fails to address the actual underlying issues. I’ve outlined my vision of the least-bad approach to protectionism, and I think I stand by what I said on that matter.
And I wish to offer my perspective about why markets will survive the new “trade war.”
1. It’s Not a Trade War til They Shoot Back
China, in particular, will probably respond with their own trade barriers. We’d see a bit more inflation from it, depending on the magnitude of what they choose to do.
But, I daresay, there is a grain of truth in this tweet:
Not a ton, but a grain or two. Having the import market gives us negotiating leverage. China’s response will be measured, because they have more to lose than we do, especially given that Trump doesn’t seem to care about losing the benefits of trade I mentioned above. We both would lose, but they would lose more from escalating, so we can expect them to be careful.
But none of this has even happened yet, and it could remain restricted to the steel and aluminum sectors.
2. The Immediate Impact is a Tiny Portion of the Economy
I looked up the annual value of US steel and aluminum imports last year, and I was shocked at how low they were. $29 billion for steel, $1.26 billion for aluminum. Yes, billion with a b is small here. Because the US economy is measured in trillions. In the $18 trillion range (GDP). Let’s just take that fairly round number. I did the math for you: steel imports are .0016% of the economy, aluminum imports are .00007% of the economy.
It is true that higher prices for steel and aluminum will translate into higher costs for industries that use those materials (automotive, aerospace, construction, etc.). There could be layoffs, or just slowed hiring. It is also true that these industries account for much more employment than steel or aluminum processing. But when forming a picture in your mind of what percent of workers are going to be affected by this, keep the above percentages in mind.
We’re talking about a fraction increase of the price of a fraction of steel and aluminum which is a direct input for a fraction of the economy.