U.S. Steel’s recently announced plant closings and major employment cutbacks highlight how trade wars can end up hurting the very industries and firms they are supposed to help. They also highlight how the rest of society can struggle with the resulting chaos.
The firm, which is somewhat synonymous with “Big Steel,” indicates it will lay off some 1,500 workers in its Michigan plants. While presumably protected by steel tariffs, U.S. Steel is plagued by trade war-crippled world demand for its products, compounded by the effects of capacity expansions that have occurred in the United States.
As reported by Yahoo Finance, “The Trump administration put 25% duties on imported steel in March 2018, fulfilling a campaign promise to help the steel industry, which [President Trump] said was suffering from dumping by actors like China.”
So how are such plainly described policy actions taken without considering what can happen when trade wars reduce global GDP growth, prices fall, and what had been a weak industry seeking government help is pushed closer to bankruptcy—all because of the politically promised tariffs? Why didn’t Mr. Trump’s economic advisors warn him?
Well, perhaps they did. And like other economists, they may have said something like this: “Other things being equal, an increased tariff on steel products will provide some temporary relief to America’s battered steel industry. But once on its feet, the industry will expand again and end up later about where it is now.”
The catch is found in the first phrase: “Other things being equal.” When trade wars reduce world GDP growth from 3.0 percent in 2018 to an expected 2.6 percent in 2019 and steel prices plummet, other things are no longer equal.
Years ago, when one of my sons was hitting the ripe old-age of 16, I attempted to explain what the 1973 Arab oil embargo was going to do to his ability to motor about in the family sedan. “Other things being the same,” I frowned and said, “there will be a rapid increase in the price of gasoline and a sharp reduction in driving family cars.”
“But that’s just the problem, Dad,” my son replied, “other things are never the same, and that’s what goofs us up.”
And what in my Arab oil embargo analysis was no longer equal? As a result of the embargo, the federal government imposed a system of price and allocation control on gasoline. Prices were frozen and it became illegal to transport gasoline across state lines. Surplus gas in one state could not be shipped to a state suffering a shortage. Long lines of cars waiting in the hope of getting a few gallons at filling stations became commonplace, as did the sight of abandoned cars with empty tanks sitting on the roadside. But the price did not go up!
After a while, nothing seemed to be equal anymore. And, as my son predicted, that’s what goofed us up.
Getting back to the U.S. Steel story and the Trump administration’s efforts to make things better, the unfortunate episode reminds us that world markets and human behavior are far more complex than many very smart people recognize. As Adam Smith suggested, some people think of men in markets as players on a chessboard where leaders might in their wisdom reach and adjust their positioning, as though everything else will remain the same. But Smith cautions us to remember that “in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chose to impress upon it.”
Other things are never the same. Yet somehow, we always seem to believe that this time will be different.