The Real Cost of the Tariffs on Steel and Aluminum

Recently, President Trump placed tariffs on steel and aluminum. The executive action restored a 25 percent tariff on steel (from the first Trump presidency) and raised the existing 10 percent tariff on aluminum to 25 percent. It also revoked exemptions for nine countries and the European Union, which had been negotiated by President Biden subsequent to the 2018 Trump tariffs. According to a White House fact sheet, the tariffs have a number of goals: revitalizing domestic industries, ending unfair trade practices and dumping of steel and aluminum, and bolstering US production. All of this, according to the communiqué, will increase US production and domestic investment, with minimal effects on prices. President Trump invoked authority under Section 232 of the Trade Expansion Act of 1962, which allows the president to adjust imports of critical materials in the name of national security. According to the White House fact sheet, “The United States does not want to be in a position where it would be unable to meet demand for national defense and critical infrastructure in a national emergency.”

Of course, these tariffs might be just so much hand-waving on the part of President Trump in order to obtain concessions from trading partners, as he recently did with Canada and Mexico. However, these latest tariffs apply to all countries (including allies, such as Australia, Canada, Japan, South Korea, the European Union, and the United Kingdom). This may signal that they are here to stay.

These tariffs are problematic for several reasons, as they will almost certainly weaken the US economy—and thus, unintentionally, national security.

Tariffs are a tax paid to the US Treasury by domestic purchasers of imported goods. Those purchasers might be domestic consumers who buy imports, but they are more likely to be American producers who use imported resources in their production and then pass the higher prices on to American consumers. Most Americans do not buy steel or aluminum. But think about the higher input prices—and thus sales prices—in construction, packaging, farm and construction machinery, military equipment, and any other finished product that uses steel or aluminum.  

This means that tariffs involve wealth redistribution. The protected domestic industry will benefit, as it can produce and sell more without worrying about more efficient foreign competition. Steel and aluminum tariffs will indeed be beneficial for the American steel and aluminum industries, including their workers and shareholders. It is no wonder that the American Iron and Steel Institute and the Steel Manufacturers Association were quick to express pleasure at the tariffs.

But that is not the end of the story. What is seen is the expansion of domestic production. Many things are not seen. Tariffs can not create wealth; they merely redistribute it. Somebody is paying for the money that is going into the pockets of American producers and into the Treasury’s coffers. Their gain comes at a loss for American consumers, who will pay higher prices; it comes at a loss for the workers and shareholders of American industries that use more expensive steel and aluminum in their production; and it comes at a cost for foreign countries, who will sell less and therefore have less wealth and fewer dollars with which to buy American exports. So the American export sector will also suffer (and that’s before any retaliatory tariffs). 

Consider that American manufacturers that use steel employ almost 50 times the number of workers employed in steel production. The effects of the 2018 steel tariffs are thus not surprising. Indeed, they created an estimated 5,000 jobs in the American steel industry and increased domestic production. So, technically, they worked . . . but those gains were offset by the 75,000 jobs lost in industries that use steel as an input.

There are two other problems with tariffs, which are even less visible.

First, tariffs redistribute value. But they also destroy it. This loss comes from the inefficient use of American resources and workers, as they produce steel and aluminum more expensively. The loss also comes from diminished purchasing power for American consumers, who must now pay more for final goods that include steel and aluminum (as they take a net hit on their stock portfolio: steel and aluminum stocks will rise, but the stocks of all the industries that use those resources will fall).

Second, tariffs create perverse incentives. The American Founders, in their wisdom, wrote a constitution that favored economic activity over political activity. Because federal powers were limited and enumerated, and because the federal government simply had very little economic involvement, there were few opportunities to lobby the government for favors. So the path to wealth was not through political activity but through work, entrepreneurship, innovation, and economic activity. That has changed over the past century. Before the New Deal, the federal government controlled less than 5 percent of GDP. It now controls about 25 percent (to which we can add 10 percent of GDP in annual compliance cost with federal regulations). That is still less than the OECD average of 46.3 percent (even if we add 10 percent of GDP spent by the states). But it is still higher than envisioned by the Founders or authorized by the Constitution. If you have any doubts about enumerated powers, and thus authorized spending, you can revisit Article 1, Section 8. Tariffs increase federal meddling in the economy; in the process, they add more opportunities to capture political favors (from seeking exemptions for one’s own industry to creating complications for competitors). It’s a small wonder that the initial enthusiasm from the steel industry was immediately matched by dismay from housing and automotive industry associations.

Tariffs are part of a cognitive disconnect on the part of the Trump administration and its economic advisers. On the one hand, the administration is working hard to cut regulations and wasteful government spending while also reducing income taxes—all of which is good for the economy. On the other hand, tariffs impoverish the country as a whole and continue the trend started by FDR’s New Deal of increased federal meddling in the economy and increasing rewards for political over economic activity.

The details may differ, but tariffs look a lot like the economic interventionism of Bidenomics. They are a step in the wrong direction.

What about national security in all this? The Chinese Communist Party and its bad behavior are certainly a serious threat to be considered. But weakening the American economy and indirectly raising the cost of military equipment through anti-market central planning like tariffs does not seem to be the wisest way to bolster American national security.