President Trump has a soft spot for the steel industry. He clearly views steel as a symbol of national power, and has finally fulfilled a campaign promise by imposing new protective tariffs likely to increase profits for domestic steel producers.
Trump plans to impose tariffs of 25% on imported steel and 10% on imported aluminum. The details aren’t clear yet, and it’s possible these could end up more limited than Trump made them sound when he first announced them on March 1. But markets have reacted aggressively, punishing companies and industries likely to be harmed by the tariffs, while rewarding the few likely to benefit.
Amid a broad selloff, shares of companies such as AK Steel (AKS), U.S. Steel (X) and Nucor (NUE) rose, indicating a belief that tariffs will allow them to raise prices, increasing their net income. Same for aluminum makers such as Century Aluminum (CENX). Those are the winners Trump has chosen.
The basket of losers is a lot bigger—and it includes ordinary consumers. As a general rule, the winners of a protective tariff are those who manufacture the product being protected, who can charge more, while the losers are those who purchase it, who have to pay more. “The tariffs will likely lead to significant increases in steel and aluminum prices in the U.S., which will hurt domestic industrial manufacturers that rely on these commodities as key raw materials in production,” analysts at Moody’s said.
Who purchases steel and aluminum? Dozens of industries, including those that build cars, computers, industrial machines, appliances, furniture, beer, soda and food cans, kids’ baseball bats, and many other everyday products. All of these industries will end up paying more for steel and aluminum, raising their costs and harming profitability.
RBC Capital Markets estimates that the basket of losing industries employs 16 times as many people as the steel and aluminum industries, which undermines Trump’s basic argument in favor of tariffs, which is that it protects American jobs. “These tariffs are a terrible idea,” RBC said in a note to clients. “It borders on absurd.”
Companies ordinarily try to pass on cost increases to the people who buy their products, which in this case would be anybody who buys a car, appliance, computer or six-pack of beer. If the tariffs go into effect as Trump has outlined them, price hikes wouldn’t be draconian, and virtually no economists are predicting a sudden spike in inflation. But even marginal price increases can depress consumption, and when demand declines, jobs go away.
A bigger threat than two sets of tariffs is an escalating series of retaliatory measures and counter-retaliatory measures that could quickly become a damaging trade war. If trade partners impose their own tariffs in response to Trump’s steel and aluminum duties, and Trump ups the ante with additional tariffs on new classes of imports, and on and on, then there could be a meaningful surge in inflation that directly harms the broader economy and kills jobs. And if Trump’s tariffs mushroom into trade wars, there will be another big set of losers: investors, who will likely suffer losses as markets fall amid worries of higher prices and clumsy government regulation that harms corporate profits.
Trump is right about one thing: The boom in free trade during the last 20 years has, in fact, hurt some workers. But it has also lowered prices for most consumers, made the economy more efficient and generated new types of jobs that in many cases are more productive than the jobs lost to globalization. Most economists say the best way to address the harm caused by free trade is to help displaced workers directly, rather than returning to the trade protections of yore, which largely disappeared for good reason.
As a basic principle, economists generally agree that businesses are most efficient when the government establishes and enforces rules of the road, but lets the private sector decide how best to deploy capital and labor. Trump’s tariffs, by contrast, would interfere with the efficient allocation of resources. Trump seems to think he knows better than the free market. The free market is very likely to prove him wrong.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman