A new 25 percent steel tariff and a 10 percent aluminum tariff have come into effect. The levies are aimed at our allies, such as Canada, Mexico, and the European Union. They are a bad idea for three reasons:
Tariffs hurt more than they help. While the levies could save as many as 33,000 jobs in the steel and aluminum industries, this comes at a great cost. Downstream industries that use steel and aluminum, such as automobiles, construction, and food and beverage production, will face higher costs. These will be passed on to consumers with higher prices, and could cost those other industries an estimated 179,000 jobs. In other words, the Trump administration is willing to shed five jobs to save one job.
Tariffs invite retaliation. Mexico has already announced it will introduce retaliatory tariffs. Affected goods range from pork bellies to cheese and steel. Europe is placing levies on iconic products such as Kentucky bourbon (Senate Majority Leader Mitch McConnell’s home state), blue jeans (Levi’s is from San Francisco, House Minority Leader Nancy Pelosi’s hometown), and motorcycles (Harley-Davidson is from Wisconsin, Speaker Paul Ryan’s home state). Canada announced intentions to impose $12.8 billion in retaliatory tariffs against U.S. goods.
The Trump administration’s unpredictability is creating economic uncertainty. And uncertainty has a chilling effect on investment. While the economy is doing well right now, this uncertainty could hurt down the road. After all, there’s no sense making a long-term investment if there is a very real possibility the administration might pass some policy out of the blue that kills your market. It is hardly surprising that the Dow Jones Industrial Average fell 200 points when the new tariffs were announced, despite steel stocks going up.
Economists are virtually united as a profession against the new tariffs. A March 2018 University of Chicago Booth School survey of professional economists found not a single respondent agreeing with the statement “Imposing new US tariffs on steel and aluminum will improve Americans’ welfare.” When the National Taxpayers Union circulated a letter opposing the Trump administration’s protectionist turn, more than 1,100 economists signed on (I am one of them).
One of the Trump tariffs’ few defenders is Peter Navarro, one of the president’s economic advisers. Even in the White House, Navarro cuts a lonely figure, with other presidential advisors such as Larry Kudlow openly preferring more open trade policies. Still, if Navarro has only one ally, he has the one who counts: President Trump.
Navarro defended the new steel and aluminum tariffs in a May 31 USA Today piece. Both what he said and what he didn’t say are revealing.
By way of background, Henry Hazlitt’s famous Economics in One Lesson is a simple one, and very relevant to this discussion: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” (p. 17)
If you want the even shorter version: look at how a policy affects all people, not just some; and look at both short-term and long-term effects. Not one or the other; both. Hazlitt’s Lesson is a must-read for any aspiring economist. It is regularly assigned in college courses, and has remained continuously in print since 1946. The paperback edition published in 1988 boasts of having sold a million copies—and that was thirty years ago. Despite Hazlitt’s ubiquity, Navarro, who was a college economics professor before taking his current job, makes it clear he has either never read, or never understood Hazlitt’s basic lesson.
Navarro opens by praising his boss, then segues to a story about a new aluminum mill opening up in Ashland, Kentucky. He also gives examples of several other plants that will be opening in the near future.
In fact, the groundbreaking ceremony at the Ashland mill will be held today. While this is great timing for an op-ed newshook or a press conference, if the groundbreaking is only happening now, that means that the planning process for opening this mill began long before the new aluminum tariff was proposed, and likely before the Trump administration itself. Infrastructure and environmental impact reviews, among other regulatory hurdles, often take years to complete. So Navarro’s lead anecdote does not actually help his case.
The larger problem is that this anecdote and the others Navarro shares look only at how the tariffs affect some people, and not all people; he forgets his Hazlitt. There is a reason Navarro argues by anecdote, and not with data: the data say that tariffs are bad policy. This particular round of tariffs will cost roughly five jobs for each one saved or created. To benefit 33,000 steel and aluminum jobs, Navarro must be willing to destroy 179,000 jobs elsewhere in the economy, and charge higher prices to more than 300 million consumers, and reduce by billions of dollars the amount of capital available to other economic sectors. This is all because he forgets to look beyond those immediate short-run benefits to a favored few. The wider costs to the rest of the economy in the long run are less visible than the freshly cut ribbon in Ashland, Kentucky, but they are no less real.
Navarro also ignores consumers. And remember, the whole point of economic production is to create things consumers want. Producers exist for consumers’ sake, not vice versa. He does mention consumers once in his piece: “Critics at the time warned the move would hurt consumers, but the tariffs have been a boon to the U.S. worker.” By the time Navarro is done with the economy, it may well have just one worker left with a job, who then literally would be “the U.S. worker.”
Grammatical gripes aside, notice that Navarro deliberately chooses the word “worker” and not “consumer” when he says who gets the boon. He then goes on to not describe how tariffs help consumers. He can’t, because they don’t. So he changes the subject. But Navarro’s elision doesn’t change the fact that higher steel prices mean cars will be more expensive, construction costs will be higher, and so will rents for stores and apartments.
Higher aluminum prices will likely add about a penny to the cost of a twelve-ounce aluminum can. Paying an extra quarter or so for a 24-pack of Diet Coke doesn’t sound like a lot, but it adds up on a family’s grocery bill, especially in the long run that Navarro ignores.
The craft beer industry is scared that its comparatively expensive products will become still more expensive compared to its larger competitors, costing the industry jobs, and depriving consumers of choices they might otherwise enjoy. For smaller producers who operate on thin margins, Trump’s tariffs are an existential threat. Producers are already looking at alternative packaging materials such as plastic and glass bottles, which would hurt the very aluminum industry the administration intends to help. Navarro does not mention these downstream industries harmed by the tariffs.
One of the strongest arguments at Navarro’s disposal is the national security argument. For example, the Defense Department requires an enormous amount of steel for its aircraft carriers, fighter jets, military bases, and more. That’s why the U.S. steel industry needs to be healthy and vibrant—if, during a war, steel imports get cut off, domestic production could mean the difference between victory and defeat. Fortunately, some simple math defuses this bomb, assuming it wasn’t a dud in the first place.
Imports currently account for roughly 30 percent of steel used in the United States. That means domestic production is roughly 70 percent. The military needs roughly 3 percent, or less than a twentieth of domestic production alone. In fact, without the new tariffs, domestic steel production is already above its 40-year average, and U.S. manufacturing output as a whole is near a record high. So the national security implications of the new tariffs are approximately zero. They can safely be called security-unrelated tariffs.
It is possible that Navarro knows better. In a May 31 conference call about the decision to enact the tariffs, one caller asked Navarro if he was open to retrospective review of the tariffs. In other words, once the tariff has been in place for a few years and there is real-world data on how it is working, would Navarro be open to analyzing what the effects have been, and whether they were good or bad on net? He refused to answer.
If Navarro was truly confident that steel and aluminum tariffs would benefit the economy, he’d be eager to put them to the test. Since his own profession is almost unanimously against him, surely he would welcome the chance to rub it in his opponents’ faces. But he isn’t, and that says a lot.
I’m not sure which possibility says worse of Navarro: if he genuinely believes what he says, or if he doesn’t. Either way, while a small constituency will benefit in the short term from the new tariffs, the larger American economy will suffer, as will our allies. And as Hazlitt reminds us, this will be true in both the short run and the long run. Someone really should send Navarro a copy of Hazlitt. The White House’s address is 1600 Pennsylvania Avenue NW, Washington, DC, 20500, c/o Peter Navarro.
For more in-depth looks into Navarro’s mistaken trade ideology, see here by me and here by Adam Smith. An Investor’s Business Daily editorial quotes me on the new tariffs here. And CEI’s press release on the new tariffs is here.
Inertia Wins! 