Trump, Trade, and Tariffs: Competition is What Will Make America Great (Again)

Source: © wissanu01 / iStock / Getty Images Plus / Getty Images

On May 31, 2018, the Trump Administration levied tariffs of 25% on imported steel and 10% on imported aluminum against Mexico, Canada, and the European Union, effective midnight on June 1. These tariffs are in large part a response to one of Trump’s most resonating campaign promises, which was to right the wrongs of the global trading order by protecting U.S. firms from “unfair” and “unjust” trade practices. However, not only will these tariffs serve as a barrier for U.S. cooperation with three of its closest allies, they will ultimately hamper U.S. manufacturers by making U.S. goods and firms less competitive in the future.

The United States is the world’s largest steel importer, having imported $29 billion worth of steel in 2017. 17% of that steel comes from Canada, 9% from Mexico, and 3.4% from Germany, as the leading European exporter of steel to the United States. The US also depends heavily on aluminum imports, with 36% of the total $23 billion coming from Canada, $1 billion from Mexico, and a collective $1 billion from Germany, France and Italy. A 25% steel and 10% aluminum tariff on these imports will mean the raw material costs for many manufacturers will skyrocket, either cutting into profit margins or forcing firms to raise prices, both of which hurt overall U.S. competitiveness. The effects will be particularly felt in U.S. states with large steel and aluminum-dependent manufacturing sectors, such as the auto plants of Michigan and the canning companies of Wisconsin, states which went red in the 2016 election.

However, the effects of these tariffs will be much wider than steel and aluminum. Canada, Mexico, and the European Union have already promised retaliatory tariffs on US goods, ranging from lamps, pork, cheese, motorcycles, denim, whiskey, cigarettes, and even pens. Canada has already announced tariffs on $12.8 billion worth of US exports, set to take effect July 1 and lasting until the US tariffs are dropped. The EU will also be imposing tariffs beginning in July, which will target $3.4 billion worth of US exports. Mexico’s own $3 billion retaliatory tariffs have already taken effect, including a 20% pork tariff that has caused particular concern for US farmers. After July 1, it will be difficult to identify a US industry not shrugging under the weight of tariffs, putting US jobs at risk.

By putting up trade walls, Trump is locking out not only trusted allies, aka (former) major buyers of US goods, but the small and medium US enterprises that rely on cheap imported steel and aluminum to make their products competitive. Such manufacturers are left with two choices: for some, the slim profit margin they had will now be demolished, as the cost of doing business has now been raised. Or they raise prices, and risk being undercut. These are the people Trump promised to protect, who now can’t afford to do business. And encouraging domestic consumers to “Buy American” to make up for lost revenue overseas is all well and good, until American products are no longer a viable, cost-effective option for many Americans. Unfortunately, patriotism alone will not be enough to foot the bill.

In theory, there is nothing wrong with a president wanting to protect domestic manufacturers from “unfair” global trade practices. But what is being lost in these tariffs is the fact that these two realms, global and domestic, cannot be separated: for U.S. manufacturers to be successful, they need the benefits that come with a global trading order, including competitive pricing on raw materials and a viable global market for their goods. This is not to say that there are no downsides to trade; indeed, it would be much easier to pretend that there is no glimmer of truth in Trump’s tirades against countries who are able to undercut U.S. firms by flouting human rights and safety regulations. However, the truth remains that by imposing restrictive tariffs on some of the United States’ closest allies, the Trump Administration has not extended a lifeboat to struggling US manufacturers, but rather has left them stranded on an island with scant resources and even fewer lifelines.

Courtney Flynn, Program Associate, Forum on the World Economic Order, Friedrich Naumann Foundation for Freedom.