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Trump’s Tariffs Are Hurting US Competitiveness

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

Trump’s Tariffs Are Hurting US Competitiveness

President Donald Trump says that America running a trade deficit means that “jobs and wealth are being given to other countries.” This statement is logically and historically false.

The left-hand figure above shows that the relationship between trade deficits and growth in the United States, going back nearly 30 years, is the opposite. Rising growth tends to increase imports through higher consumption. The imports have not meant that “jobs and wealth are being given to other countries”: they have been a sign of a strong US economy.

Still, President Trump is determined to reduce America’s trade deficit through massive new tariffs on steel, aluminum, automobiles, washing machines, and other products. The idea is that if America stops importing such goods, it will start making them here. But with the US unemployment rate at 3.8 percent, an eighteen-year low, there is little if any spare capacity to accomplish this. The capacity would have to be transferred from other sectors. The overall effect of tariffs is therefore to reduce US consumer purchasing power through higher prices—not more jobs, not more growth, not higher net exports.

But even this picture is way too rosy. That is because American companies depend on imports to stay globally competitive. Upon losing access to foreign parts, they will lose market share to companies operating abroad that can access them and therefore sustain lower prices and higher quality.

Critically, as the right-hand figure above shows, most imports into the United States are not final goods but intermediate goods—that is, inputs used to make American products, which can then be sold around the world. In fact, nearly all the Chinese exports that Trump singled out for tariffs in April qualify as capital equipment or other inputs. The loss of such inputs is a direct harm to US companies.

Trump trade advisor Peter Navarro does not believe this. “It does the American economy no long-term good,” he said in January, when its firms are “assembling ‘American’ products that are composed primarily of foreign components.” But this is nonsensical. Whether an American product is made “primarily” with US or foreign components tells us nothing about whether tariffs are beneficial. An American product may simply be impossible, or too costly, to make without those components.

And we know, in fact, that Navarro understands this. That is because he has defended US penalties against Chinese telecom equipment manufacturer ZTE, which have cut it off from US suppliers. ZTE is so dependent on US computer chips that its operations have been brought to a standstill by US sanctions. Navarro thinks ZTE can’t survive without foreign components. So why does he think US firms are different?

Trump has imposed tariffs on Chinese shipments of export cargo and import cargo in international trade.

Trump Tariffs Slam Canada, EU—Not China

At the recent G-7 Summit meeting in Quebec, the first such summit ever to fail to produce a joint communiqué, President Trump served notice to America’s allies that his country had no shared interests that deserved precedence over boosting United States net exports. Trump lashed out at his Canadian host over milk tariffs, which account for 0.2 percent of US-Canada trade, while telling the French president that the EU was “worse than China” on trade.

While it is easy to dismiss such language as characteristic Trump hyperbole, weaponized to soften up negotiating partners, it is notable that the president’s recently imposed tariffs on steel, aluminum, washing machines, and solar panels actually reflect, remarkably, “worse than China” thinking. As we show in the graphic below, Canada is by far the hardest-hit by the tariffs, with over $12 billion of annual exports targeted. ­­­The EU is second, at just under $8 billion. China, a far more grievous transgressor of trade rules and norms, is way back there at under $3.5 billion.

As we’ve argued elsewhere, Trump appears to be targeting allies as a means of rupturing their mindset—convincing them that they are no longer deserving of American coddling just because of their geopolitical status. The big question Canada and the EU must answer for themselves, now, is whether Trump is an unfortunate temporary anomaly, or merely the first in a coming succession of “America First” presidents.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

Canada and Mexico May Be Big Winners From Steel Tariffs

As the Trump Administration slapped 25-percent tariffs on imported steel, two countries are set to be big winners.

Back in 2002, President George W. Bush imposed 30-percent import tariffs on most steel products, exempting Canada and Mexico. While also exempting some developing countries with small market shares, this move stymied most of Canada and Mexico’s non-US competition. The result, as our main graphic above shows, was a huge boost to their share of US steel imports, from 24 percent to 35 percent. Moreover, after the Bush administration repealed tariffs at the end of 2003, Canada and Mexico sustained the larger share of the US market they had taken over the previous twenty-two months—as we show in the small inset graphic. The Bush “tariffs . . . saved the Mexican steel industry,” according to the CEO of steelmaking equipment manufacturer Magneco/Metrel, who testified at a 2002 House hearing.

Now, Canada and Mexico are set to win big again. Canada is currently America’s number one foreign supplier of steel, at 16.7 percent of total imports; Mexico is number four, at 9.4 percent. As the experience of the Bush tariffs shows, some of the boost in US market share the two can anticipate should, given the stickiness of supply chains through time, endure beyond the eventual elimination of the Trump tariffs.

The president is using the exemptions as leverage in NAFTA reform negotiations, so it remains to be seen how long the NAFTA-partner advantage will last. But for now, when it comes to steel, at least, Trump is set to Make NAFTA Great Again.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

Trump Steel Tariffs Could Kill 40,000 Auto Jobs

I want to bring the steel industry back into our country,” declared President Trump last month. “Maybe [things] will cost a little bit more, but we’ll have jobs.”

Tariff opponents in Congress and industry, however, have argued that what may be good for steel won’t be good for other industries. Asked why auto manufacturers are so opposed to tariffs if the impact on their costs is minimal, as the administration is arguing, newly elevated Trump trade adviser Peter Navarro was dismissive. “Look, they don’t like this. Of course they don’t,” he said. “What do they do? They spin. They put out fake news. They put all this hyperbole out.”

Is Navarro right? To answer, we’ve analyzed historical data to estimate the impact of Trump’s proposed 25 percent steel tariffs on auto sales and employment.

We estimate that an average car requires roughly 1.2 tons of steel to build. Given that tariffs tend to increase import prices (which determine domestic prices) by at least as much as the tariff, we calculate that a 25-percent steel tariff will increase the price of new passenger vehicles manufactured in the United States between 0.5 and 0.8 percent.

Now, based on calculations for the sensitivity of auto sales to price, we estimate that such price rises of American-made cars would translate into a decline of between 1.6 and 3.6 percent in global sales.

But what does this mean for American auto jobs? The historical relationship between US auto sales and employment is tight, as shown below.

Based on this relationship, we would expect declining sales to result in auto-industry job losses ranging from 18,000 to 40,000 by the end of 2019.

Given that employment in the US auto industry is vastly higher than in the US steel industry, such job losses would swamp any possible increase in steel employment. the total amount of jobs at risk from Trump’s steel tariffs in the US auto industry alone is equivalent to almost one-third of the entire US steel industry workforce.

In short, Navarro is wrong—deeply so. Employment in the US auto industry will suffer from Trump’s tariffs to a vastly greater degree than it could possibly benefit in the US steel industry.