Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation

Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation

Timothy Taylor 07/01/2019 6
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The Trump administration imposed tariffs on imported steel back in March 2018, using the implausible excuse that it was necessary for national security(for some countries, the tariffs were later changed to import quotas with similar effect). The results are utterly unsurprising: profits for US steel companies have risen and some jobs for US steelworkers have been gained, but at an exorbitant cost for US consumers and for other US workers. Gary Clyde Hufbauer and Euijin Jung lay it out in "Steel Profits Gain, but Steel Users Pay, under Trump’s Protectionism" (December 20, 2018, Peterson Institute for International Economics).

A protected industry benefits from less import competition. It uses that protection to raise prices for consumers and to earn higher profits. It should be emphasized that these higher price and profits are not an unexpected outcome--they are the mechanism through which import tariffs help domestic firms. To put it another way, if tariffs didn't help domestic companies charge more and raise their profits, there would be no point to having such tariffs in the first place.

Hufbauer and Jung write:

"Calculations show that Trump’s tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created."

Many studies over the years find that trade protectionism saves jobs, but at a high cost to consumers (For example, here's an example of how the Obama administration tariffs on imported tires cost consumers about $900,000 per job saved in that industry.) The underlying issue is that consumers aren't just paying higher prices to save US jobs--if that was the tradeoff, we could argue over whether it might be worth doing. But the higher prices are part of higher revenue for steel companies, which maybe used for purposes ranging from robots and automation to research and development, or higher profits for shareholders and higher bonuses for managers.

In addition, any jobs saved for US steelworkers are not a net gain for the US economy. The higher costs of steel are then passed along to products, leading to lower sales for those industries. The Whirlpool company offers a vivid example. The company strongly supported the Trump administration when it put tariffs on imported washing machines, which helped Whirlpool. But then when the Trump administration put tariffs on steel, driving up the price of making a washing machine in the US, it hurt Whirlpool. As the head of Whirlpool said: "the net impact of all remedies and tariffs has turned into a headwind for us." 

Hufbauer and Jung mention (without endorsing) some estimates that the steel tariffs could be a net loss in US jobs by the time that the effects of higher steel prices are passed through industrial supply chains, making many products more expensive to make within US borders.  And of course, these calculations don't take into account the economic effects of retaliation from other countries, and how that costs US jobs in other industries.

Again, this dismal cost/benefit calculation for the steel tariffs is utterly unsurprising. Steel tariffs are just an indirect subsidy to the steel industry. Sure, US steel tariffs also make foreign steel producers unhappy, but the happiness or unhappiness of foreign producers is not a useful goal for US economic policy.  The main costs of the steel tariffs are imposed on US firms that use steel (and will have a harder time selling inside and outside the US) and ultimately on US consumers (who will pay more than consumers around the world for products containing steel). 

A version of this article first appeared on Conversable Economist.

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  • Bethany Jack

    Cheaper steel and aluminum means more American jobs in everything from machining to to electronics manufacturing. Those lower input prices have ripple effects throughout every corner of the American economy and can ultimately affect gas prices, food prices, the housing market, medical costs and much more.

  • Jesse Lloyd

    If China wants to send us cheap goods and materials at the expense of their own taxpayers and simultaneously allow us to conserve our own natural resources, why should our government stand in the way of that? I see these tariffs as a heavy-handed, authoritarian infringement on the right of American citizens to make decisions about how they want to spend their own money.

  • Emma Simpson

    This situation is short term while Trump negotiates a better deal. I have confidence in Trump. Just give him some time.

  • Matthew Hutton

    American steel sounds good to me

  • Ryan Quaid

    World market means we have 200 other countries.

  • Scott Donnachie

    America has a short memory... other countries do not.

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Timothy Taylor

Global Economy Guru

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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