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Trump’s tariffs are an echo of the 60s economy

Trump’s Tariffs Are An Echo Of The 60s Economy

A couple of weeks after US President Donald Trump announced tariffs on steel and aluminium from foreign countries, it’s increasingly evident that his actions are not going to trigger some huge global trade war.

Three countries – Australia, Canada and Mexico – have won a vague promise of an exemption. Meanwhile, China is positioning itself against the US as a global champion of free trade – and wow, that’s a sentence I didn’t think I’d ever write. And the rest of the world is adopting an increasingly familiar stance: shrug, and hope that this all goes away come November 2020, when US voters re-evaluate Trump.

China is positioning itself against the US as a global champion of free trade – and wow, that’s a sentence I didn’t think I’d ever write.

It would be nice to think that the general calmness about US tariffs has come about because more and more governments realise just what a poor policy tool they are.

In Australia, where we spent billions propping up the car companies to no obvious long-term gain, one truth is particularly obvious: tariffs don’t automatically strengthen industries. Having suffered more expensive cars and spent billions subsidising the industry for nearly 70 years, we’ve slowly shut down our car industry in the past quarter century – but at the same time we’ve enjoyed our longest-ever period of national economic growth.

Tariff supporters sometimes resort to claiming that “there’s no such thing as free trade”. And in a sense they’re right; all trade is affected by all sorts of government practices and, for that matter, social biases as well. But if you’re willing to listen to the lesson, history teaches that there are few effective tariffs either.

Less obvious but equally true is that tariffs push prices up for consumers and businesses. When George W Bush imposed US steel tariffs back in 2002, that was the argument that got them killed within two years. Steel users do everything from carmaking to building skyscrapers, and they employ far more people than steelmakers. A welter of research suggested the Bush tariffs were costing more jobs in steel-using industries than were saved among the producers.

This unseen cost of tariffs is hard to measure; you probably shouldn’t bet your life that those 2002 steel tariff studies were accurate. But the economic evidence says pretty loudly that tariffs damage most the countries that impose them. The proposition unites economists of every stripe.

In these circumstances, ‘tariff retaliation’ – against the US over steel, or anywhere else – makes little sense. When someone is determined to shoot themselves in the foot, and sprays your trousers with blood in the process, it makes no sense to shoot your own foot off in retaliation. If Trump reneges on his exemption, then as Reserve Bank of Australia’s governor Philip Lowe has noted, our best strategy is still to do nothing.

It would, as I mentioned, be nice to think that policy makers and even voters now understand this pretty well. The truth, though, is probably simpler. Steel just doesn’t employ that many people in Western economies any more, and it will soon employ even fewer, whatever happens.

Some of those jobs have gone to China and other lower-income countries. But developed-world steel plants are also being automated; they just can’t create the huge chunk of jobs they used to do. One Austrian steel plant reportedly produces 500,000 tonnes of steel a year with just 14 staff.
Steel tariffs were powerful politics in the 50s and 60s, when Trump was growing up. That’s probably why Trump likes them so much. But these days, not many people feel like starting a trade war over them.

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