This week, Donald Trump announced that he is imposing tariffs on foreign steel and aluminum, tweeting “To protect our country we must protect American steel!”
This is a completely illogical policy. It is not at all based on sound economics, and the result is a significant net-negative on America’s (and also the world’s) economy.
It is shocking to me that tariffs are still a thing. Politicians all over the world keep making this mistake, and I am starting to wonder, are they really ignorant, or are they simply doing this to gain votes from ignorant voters even at the cost of the damage done by their stupid policy?
The fallacy in this kind of thinking stems from a simple omission: the mistake of only regarding the positive effect on a small subset of the economy (in this case, the American metal industry) while ignoring the negative effect on the economy of the country as a whole.
So let’s actually think through this issue and figure out what happens to America’s economy as a result of the imposed tariff on metals.
First of all, we must recognize the reason we import any commodity in the first place. The United States imports foreign metals because there happen to be other countries who produce that same metal more efficiently than we do. This makes perfect sense, why would we pay more for an American metal, when we can just import the same exact metal from another country for cheaper?
A person thinking only about the American steel industry then comes to the erroneous conclusion that foreign metal industries are bad for America, because we should be producing more of the metal here “to put America first, and to bring back our jobs.”
This results in a policy like this tariff on foreign metals. Now, those foreign metals are artificially made more expensive in the United States. Because of this, other American industries that need metal to produce their products are now forced to eat the cost by either buying the artificially expensive foreign metal, or the already expensive American metal.
And here is the problem. Now all of a sudden, an American car, say, that used to be made out of inexpensive metal imported from overseas, is suddenly forced to be manufactured from more expensive metal made in America. To the consumer, that means this car is more expensive than it used to be. That naturally leads to the consumers buying less American cars and switching over to cheaper alternatives such as Japanese cars. At best, we “saved” a few jobs in the American steel industry at the cost of jobs lost in the American car industry. In addition to those lost jobs, the American consumers also now have less money, because many goods are now costing more than they used to. The effect of that lost money is hard to trace, but it means less money in the system that could have been used to buy some product in some other industry, so that unknown industry is now short of the need to create that product which directly means less jobs in that industry. I used cars as an example above but the damage is actually distributed across a countless number of industries.
It doesn’t take a doctorate degree in economics to understand the damage of such an erroneous policy if we just simply follow the exchanges. Yet we keep falling for it. To me, there’s no better reminder that our education system has failed to do its one job: to educate citizens to think critically. It concerns me greatly that we continue to fail to make informed decisions based on sound logic and reason. Why don’t we ever stop to think to ourselves for a second, “wait, why is this politician doing this, and what’ll actually happen as a result?” and calling them out for their stupidity without resorting to tribalism and choosing sides based on the politicians’ image, party loyalty, or our views on just one or two issues that we happen to care about that doesn’t even matter that much, like gun control, our fight against terrorism, and many other statistically insignificant things that the profit-driven news programs made us believe are the most important issues? All this while ignoring issues that are actually much more significant. It seems crazy to me that so much of our recent discourse has been about our outrage at things like lack of gun control or Trump alluding to arming of teachers which was no more than a ploy to garner attention, while we go on ignoring things that harm a lot more people, like the lack of equity of access to education, dangers of bad nutrition, and the countless subsidies, tariffs, and regulations that politicians have enacted throughout history that do nothing more than to harm our productivity and, naturally, our quality of lives.
After explaining all of this, some people wonder, “but isn’t it bad for us to support other countries’ economies by purchasing their goods, making us less competitive?” Ok, a fair question, but actually, no, not at all. If other countries are willing to sell us their goods, we are paying them with the money that, in order for them to get any value out, must be invested back in America. It is an exchange. Mathematically, the amount of all imports and exports for any given country must always balance out. If not in forms of tangible goods, then in the form of currency exchange that will eventually be traded for a tangible good in some future timeframe. By enabling free global trade, we enrich the entire world’s economy. This isn’t a controversial issue: economists of all political inclinations agree on this point, other than the fake economists who make a living through their ties to special interests. If we instead artificially cut off the flow of trade, we impoverish more people.