Economists often talk about how well-intentioned economic plans have unintended consequences. It turns out that ill-intentioned plans have unintended consequences too.
President Trump’s tariffs, which began in earnest with tariffs on imported steel in March 2018, are motivated by a combination of economic theory debunked over 200 years ago and unabashed political opportunism. At the heart of both motives is the idea that tariffs will greatly benefit a domestic industry even as they cost the economy at large. It’s the trade-off that puts the “protect” in protectionism.
But the interconnectedness that makes damage to the global economy from such policies inevitable does not spare the steel industry. In the spring, my colleague Pete Earle and I noted that early data on steel production and imports suggested the 25 percent tariff was not having its intended performance-enhancing effect.
Now, as more data come in, Bani Sapra and Paul Wiseman of the Associated Press have delivered a devastating assessment of the impact of tariffs on supposedly “protected” domestic steelmakers.
These days President Trump speaks of tariffs mainly as bargaining chips to extract concessions from the Chinese and other foreign governments. Before fully retreating into this 1980s-boardroom flashback where he puts the squeeze on his suppliers, the president was singing another tune. In early 2019 he tweeted that “Tariffs on the ‘dumping’ of Steel in the United States have totally revived our Steel Industry… A BIG WIN FOR U.S.”
The year 2019 has not been kind to this declaration. The litany of awful results for America’s steelmakers this year, as reported by Sapra and Wiseman, is worth quoting at length:
For the first few months after Trump’s tariffs took effect, steel prices did rise. The price of a metric ton of hot rolled band steel hit $1,006 in July 2018, according to the SteelBenchmarker website, which tracks steel prices. Since then, it has plunged to $557 — lower than before the tariffs.
The first sign of trouble showed up on the stock market. Shares of steelmakers had topped out on Wall Street in February 2018 before the tariffs hit. Since then, the NYSE Arca Steel Index has plunged 32%.
The combined earnings of US Steel, AK Steel, Steel Dynamics and Nucor tumbled more than 50% in the first two quarters of this year. Capacity utilization dipped back below Trump’s 80% target in July and August.
And the tariffs have so far done nothing to blunt China’s dominance. China accounts for 54% of world steel production. The United States, 5%.
The assumed logic behind a tariff is that it bails out higher-cost domestic producers who are being undercut in price by lower-cost importers. It’s supposed to give domestic producers a window in which they can raise prices but remain at or below the effective price of imports. The story is so straightforward than even many vocal critics of tariffs don’t bother to question it.
Against the vast preponderance of evidence, the administration is sticking to this story. The Commerce Department said in a statement that “it is true that industry conditions globally have weakened recently, but their effect on the U.S. industry would be worse without these measures.”
The trouble is the emerging consensus that the president’s trade war is the biggest cause of weakening global economic conditions. While the global economy doesn’t lend itself to definite cause-and-effect relationships, the Wall Street Journal took a hard look at recent data and concluded:
The strong evidence is that trade policy is the main growth culprit. U.S. manufacturing has slumped, which is related to slowing exports. Slower growth in China from the trade war has reduced the exports of U.S. farm, industrial and construction equipment. The third-quarter decline in spending for information processing equipment, much of which is exported, was the largest in seven years.
Nobody can quarantine a major industry from the global economy, in part because of the latter’s impact on customers. The U.S. employs many more people in industries dependent on steel as an input than it does in steel itself. Already hit with the direct impact of the tariffs themselves, these industries have felt the pinch of the global downturn especially hard. The resulting drop in demand for steel explains how a 25 percent tariff appears to have lowered prices for steel.
The administration’s best-laid protectionist plans are not immune to a bit of irrational exuberance from the steelmakers themselves. Sapra and Wiseman write, “Flush with optimism after Trump’s tariffs took effect, they went on an expansion spree, creating a capacity glut that Bank of America Merrill Lynch analyst Timna Tanners calls ‘Steelmageddon.’”
Finally, no inventory of unintended consequences is complete without the inevitable opportunity for big, established industry players to manipulate rules to their advantage. One source of such rent-seeking, counterintuitively, is the process by which steel importers are supposed to be able to get out of paying the supposedly protective tariffs.
Mercatus Center’s Christine McDaniel and Joe Brunk have taken stock of the process by which these exclusion requests are processed, and paint a depressing yet familiar picture. Steelmakers can file objections to these individual importer requests, and it turns out two companies, U.S. Steel and Nucor, account for 60 percent of such objections. Objections slash the odds that the government approves an exclusion request from 59 percent to 13 percent. A continuing business relationship with two of our largest steelmakers seems like the best way to dodge a tariff for which they lobbied.
This is all something of a Pyrrhic victory for the administration’s critics. The unintended consequences of this terrible policy don’t negate it but rather make it worse, and the whole global economy suffers. The large number of administration critics who favor top-down policies of the progressive variety should be particularly careful not to celebrate loudly. If a tax on steel imports is this wild a bull in the china shop of the global economy, how about a tax on carbon? What about a tax on wealth?
President Trump and his pro-tariff supporters fear change — specifically the change wrought by the ever-increasing interconnectedness of our economy at every level. We all benefit from this trend, but the upheaval it causes is undeniable.
Had a significant number of Americans not faced difficulties from our evolving economy, Donald Trump likely wouldn’t be president. At best, the trade war promised to help those people at the expense of everyone else. In reality, we’re all so connected that such a destructive policy is bound to harm everyone.