US President Donald Trump has reignited the international trade wars with his decision to slap tariffs on steel and aluminium, of 25% and 10% respectively, from the EU, Mexico and Canada. The tariffs are designed to help an ailing US steel industry, but do not come free: the move has already been met by retaliatory measures from the affected countries. The truth, of course, is that both Trump’s tariffs and the reaction of his counterparts are hugely misguided: nothing good comes from tariffs. To see why, we only need to look history.
There is plenty of precedent in US history for protectionist trade policies, and we do not have to go too far back to find examples. George Bush did it with steel in 2002, a policy that is estimated by one study to have cost up to 200,000 jobs in industries that relied on steel in production. Most recently, Barrack Obama did it with tyres in 2009. That policy was the topic of a 2012 study by Gary Clyde Hufbauer and Sean Lowry of the Peterson Institute, in which they sought to quantify the effects of the tariff. Their findings provide valuable insight in the unintended (but actually quite predictable) consequences of protectionism.
First some background: on April 20, 2009, the elegantly named United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union, filed a petition with the US International Trade Commission (ITC) requesting they investigate passenger vehicle and light truck tire imported from China. The investigation found that Chinese tire imports had indeed increased rapidly in the preceding years and that US manufacturing and exports had been falling. So the ITC recommended that Chinese tires be subject to a tariff, and the president was happy to oblige: by September 2009 ad valorem tariff duty of 35 percent was introduced for a year, dropping to 30 percent in the second year, and 25 percent in the third year.
Of course Chinese imports fell dramatically, and while Hufbauer and Lowry found that manufacturers in Thailand, Mexico and Indonesia to a large extend stepped in to the void left by the Chinese, the intended boost in prices did materialise: the study estimate that tyre prices rose by around 18%. Good for manufacturers, but the American consumers ended up paying $1.1 billion more for car tires during the period of the tariff. What did all this money buy? In his State of the Union address in 2012 President Obama boasted that “over a thousand Americans are working today because we stopped a surge in Chinese tires.” Statistics support his claim; the tyre industry did indeed see employment rise by 1,200 people from 2009 to 2012. The problem however is that 1,200 jobs for $1,100,000,000 works out at more than $900,000 per job.
That is a big problem, and one that any advocate of protectionist policies cannot explain away. By focussing only on the jobs saved by the policy Obama was guilty of looking only at what he had purchased with no regard for the price. It should also be noted that there were other consequences: China, unsurprisingly, was unhappy with the Americans and before long they had retaliated and (somewhat randomly) chosen chicken as the subject of an import tariff. American poultry manufacturers therefore also paid for the jobs in the tyre industry. On top of all this, Hufbauer and Lowry estimate that around 2,500 jobs were lost across various industries as consumers reduced spending on other goods due to the rise in cost of tires.
All in all, a damning case against protectionism. Whether Donald Trump and other politicians are ignorant of this or see tariffs as a politically expedient way to curry favour with parts of their electorate is unclear. But for every winner from trade wars there are multiple losers. Politicians serve their people best by freeing up trade from any and all political influence, and let real free trade develop around the globe.