When Trade Is No Longer Free

Common sense does not dictate national policy. Every U.S. president and member of Congress is influenced by personal experience and ingrained beliefs. If you’re president, you’re also surrounded by a cadre of advisors who typically share and reinforce your beliefs.

And so during the Obama Administration, when common sense should have suggested otherwise, we had more new regulations than any previous president, the world’s highest corporate tax rate and taxes on foreign profits than drove many American companies to move their headquarters to foreign countries.

The Trump Administration has driven taxes lower and deregulated, and the result, not surprisingly, has been faster economic growth and the lowest unemployment rate since 2000. And American companies are staying in America.

But now attention is turning to trade, where common sense and history should reinforce the need for free trade. Yet the Trump Administration is moving forward with tariffs.

As we reported in March, the Trump Administration approved tariffs of 25% on steel imports and 10% on aluminum, but initially exempted Canada, Mexico and the European Union. Those exemptions have now been lifted and tariffs on other imports, such as autos, are being considered.

World’s Largest Trade Deficit

It’s true that the U.S. has a long-standing trade deficit. Its $566 billion trade deficit is the largest in the world ($2.895 trillion in imports minus $2.329 trillion in exports).

It’s also true that some countries take unfair advantage when trading with the U.S. China, in particular, which accounts for more than half of the U.S. trade deficit, demands access to intellectual property from U.S. companies that wish to export to China.

But is a trade deficit such a bad thing? The U.S. has a long-standing trade surplus for services and the goods it imports can often be manufactured at a lower price abroad than in the U.S. One reason they can be made more cheaply abroad is that foreign workers typically earn much less than U.S. workers.

Why Tariffs Won’t Help

While U.S. steel companies may initially benefit, tariffs will not restore steel to its previous economic status as a major employer.

One reason is that steel production is highly automated today. As recently as 1980, it took 10 hours of labor to produce a ton of steel. Today, according to The Wall Street Journal, it takes two hours of labor.

And tariffs may be designed to make domestic companies more likely to use U.S. steel, but they are already predominantly using U.S. steel. America produces 73% of the steel consumed in the U.S.

If foreign countries buy less U.S. steel, the net impact on the industry may be negative. Canada accounts for half of U.S. steel exports, while Mexico accounts for 39%. Given that steel from both countries is being subject to tariffs, while negotiations for altering the North Atlantic Free Trade Agreement (NAFTA) have stalled, it’s likely that both countries will significantly reduce their imports of U.S. steel.

In other words, tariffs may result in fewer imports of foreign steel and alumnium, but they will also result in fewer exports.

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