How Tariffs Will Damage the Economy

How Tariffs Will Damage the Economy

In our last post, we explained why tariffs will likely have a negative impact on the steel industry, resulting in fewer exports.

But there are many other reasons for opposing tariffs, which could severely damage the U.S. economy. Here are some of the reasons why that is so:

Retaliatory tariffs. Countries that are subject to U.S. steel tariffs will impose tariffs not only on U.S. steel, but on other U.S. goods.

“Europe has teed up tariffs of up to 50% on $3.3 billion of U.S. products including bourbon, motorboats, cranberries and playing cards,” according to The Wall Street Journal. “Canada plans to hit up to $12.8 billion in products including U.S. steel, yogurt, hair lacquers, beer kegs and sailboats. Mexico announced tariffs on U.S. steel, lamps, pork, apples, grapes and cheese.”

If a trade war develops, it could have a negative impact on economies worldwide.

Costs will increase. The net result of the U.S. trade deficit has been that it has allowed U.S. consumers to purchase goods at a lower cost. Tariffs will not only increase the price of imports, they will increase the price of goods produced in the U.S. With less foreign competition, U.S. producers will be able to increase prices more rapidly.

The tariffs are beginning just as inflation is starting to increase. The Federal Reserve Board, which has been trying for years to boost inflation, will likely be trying to find ways to control it over the next few years.

Fewer jobs, lower wages. When American businesses have to pay more for raw materials, such as steel, they can only raise prices so much, as they need to remain competitive. At some point, they are likely to lay off workers, pay lower wages or both.

Tariffs won’t reduce the trade deficit. Reducing imports without changing underlying levels of savings and investment would raise the value of the dollar, causing exports to fall. Deficits would remain unchanged, but reducing overall trade would make the country poorer, according to the Council on Foreign Relations (CFR).

“When the trade deficit goes down, capital inflows from abroad go down with it,” according to CFR economists. “And since foreign capital fills the gap between savings and investment at home, savings must rise or investment must fall.”

Tariffs won’t create jobs. When imports threaten jobs in one sector, they are created in another sector. There is no correlation between trade deficits and overall unemployment.

Tariffs may stunt innovation. The more competition companies face, the more they need to innovate. According to Russ Roberts of The Hoover Institution, by directing resources to where the economy is most competitive, trade “creates new opportunities and society-wide advances that improve life for everyone in often unforeseen ways.”

America will be less secure. President Trump cited Section 232 of the Trade Expansion Act of 1962 as the reason for imposing tariffs on steel and aluminum. As we’ve previously noted, though, it’s our allies who will be most affected by the tariffs.

If our allies are hurt by U.S. tariffs, they will be less likely to support the U.S. on security issues. For example, will European countries that have found trading with Iran to be profitable stop trading, because the United States wants to re-impose sanctions on Iran? Meanwhile, in Mexico, growing animosity toward the U.S. could lead to the election of an anti-American administration.

It has also been argued that trade produces peace, and that a trade war could progress into a real war.

“Trade is the ultimate peacemaker,” Joe Jarvis wrote on Zero Hedge. “When two people – or peoples – benefit from one another, they only hurt themselves by hurting the other.”

So instead of imposing tariffs, America should be negotiating with other countries to lift tariffs. Instead of renegotiating trade agreements, America should be leading negotiations for new agreements.

The freer trade is, the more we will all benefit.

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