Raising Tariffs – A Stupid Economic Decision

Recently when Donald Trump announced that he would impose a 25% tariff on imported steel and a 10% tariff on imported aluminum, his announcement was met by strenuous objections from many sides including many Republicans and Democrats in Congress.  This particular type of nationalistic, America first protectionism flies in the face of traditional Republican free trade policies.  However, even informed Democrats, the traditional protectors of American jobs, understand that this is not path they want to tread.

Since the end of World War II both Republican and Democratic presidents have traveled down the path of maximizing trade with other countries, not out of a sense kindness for the people of the world, but because it was the economic policy that was best for this county.  The last president to impose new import duties was Lyndon Johnson who imposed a 25% tariff on light trucks to particularly target the then popular Volkswagen van or mini-bus.  However, even that was in direct retaliation to a tax imposed by the German government on American poultry products aimed at protecting German chicken farmers.

As you have probably already learned, one of the reasons why Trump’s new tariff policy is economically unsound is because it will essentially impose a tax on American consumers and will result in the loss of American jobs in other areas.  Think of all the products Americans buy everyday which are made from steel and aluminum, from automobiles and steel I-beams to toasters and ball bearings, from aluminum aircraft and boats to aluminum foil and beer cans.  When the prices of raw materials go up, so do the prices of finished products. These tariffs will also increase the costs of the products our government buys with our taxes.  Think of how much steel and aluminum goes into the weapons, vehicles, and supplies used by our military. Contemplate how much steel and aluminum is used in the construction of a tank, a large aircraft, or even a Navy aircraft carrier.

As the price of all of these products increase, American consumers and our government will be able to afford fewer of them resulting in the loss of American jobs.  In addition, the finished products which contain steel and aluminum like automobiles and aircraft which we export to other countries will also suffer price increases which will make them less competitive abroad resulting in the loss of still more American jobs.

Then of course you have probably also heard about the cost of retaliation, when other countries respond to Trump’s protectionist policies with tariff increases of their own. Our trading partners, including our best allies, are not going to stand idly by while Trump attacks important sectors of their economies.  They are going to respond.

The President of the European Union has already mentioned possible retaliatory tariffs against three iconic American imports, blue jeans, bourbon and Harley-Davidson motorcycles; obviously he is trying to get Trump’s attention.  Prime minister of Canada, Justin Trudeau, called the Trump plan “absolutely unacceptable” and promised “responsive measures” if Canadian steel and aluminum products are affected.  Obviously, the American industries hit by foreign retaliatory tariffs will be hurt resulting in the loss of additional American jobs, but the damage is unlikely to end there.

In situations like this, retaliatory actions often spiral out of control and in this case that possibility appears to be preordained.  Trump has already responded to the threat of possible European retaliatory tariffs saying if EU imposes new tariffs on American products he will in turn in turn impose additional tariffs on European cars. If the EU responds in turn in kind . . . well, you get the idea. Only a fool says that trade wars are easy to win; in the real world everyone loses in a trade war.

Picture an escalating tariff war with all of our major trading partners.  The result will be the loss of jobs in each of the countries involved including the US and higher prices for all of our citizens, eventually resulting in a major worldwide economic collapse.  It is just this kind disastrous result which has kept the governments of all of the world’s major trading countries on the free trade path despite the continuing pleas in every country to protect local industries. Like it are not, all of the countries of the worlds are now not only closely connected communications wise, but also economically and there is no retreat to the type of antiquated protectionist policies that Trump proposes without major consequences.

Then we need to consider whether the solution Trump wants to impose will remedy the issues he says he wants to address – the dumping of steel and aluminum on the world market at less than cost prices and the need to keep America strong.  In this regard let’s use the steel example because that is where Trump intends to impose the higher tariffs.

In 2017 US steel companies produced 816 million metric tons of steel and we imported 26.9 million metric tons from other countries, down from 40.3 million metric tons of imports in 2014. (The amount of steel used in this country varies considerably from year to year.) US companies also exported 2.2 metric tons of steel.  Ten countries accounted 78% of the steel imported by the US in 2017 with the rest of the world responsible for the rest.  Those ten countries were: Canada 16%, Brazil 13%, South Korea 10%, Mexico 9%, Russia 9%, Turkey 7%, Japan 5% Taiwan 4%, Germany 3%, and India 2%.

Obviously this list contains our some of our strongest allies, but conspicuously absent from the list is China.  To pretend that these allies like Canada, Mexico, Japan, Taiwan and Germany would deprive the US of the steel we import from them in an emergency, thus threatening our national security is absurd.   In addition, China is the only country which Trump has accused of illegally dumping steel on the world market, and they only responsible for about 2% of our steel imports. So if he are trying to punish China for illegal dumping, Trump has picked a strange way to do it.

However, Trump all about protecting American jobs so the benefit from the steel tariffs will go to the 143,000 steel workers who currently populate the industry – which amount to less than one tenth of one percent of the American workforce. How many other American jobs will be lost and how much will each of us will pay in increased prices is still to be determined.

On the other hand, the fact that there have been huge losses in US steel jobs over the years is undeniable.  In 1953 steel industry employment peaked at 650,000 and it has been in declined to less than one fourth of that amount today.  However, the vast majority of those jobs were lost not because of steel imports, but due to automation, other efficiencies, and major changes in the methods in which much of the steel used today is produced.

Previously, raw iron ore was combined with coal and limestone in giant blast furnaces to make steel. Companies like US Steel employed thousands of workers at giant plants that not only produced raw steel from molten metal, but also converted it into finished or semi-finished products such as pipes, tubing, flat sheets, etc. in the same giant plants. Today, much of US produced steel is made in relatively small batches in electric furnaces which are used to recycle steel from scraped automobiles and the like.  The process is super-efficient.  With all of the innovations and process changes which occurred in the steel industries in recent years the 10.1 man-hours needed to produce a ton of steel in the 1980 has been reduced 1.5 man-hours today. Obviously far fewer steel worker in the industry today for that reason alone.

As a result, the vast majority lost steel jobs in this country, like the lost coal jobs, are never coming back regardless of what kind of tariffs Trump imposes on our trading partners.  This is but another example of the Trump administration placing emphasis on the jobs of yesterday while failing to prepare to lead the world in the endeavors which will produce the jobs of tomorrow.

Addendum: My personal perspective on the steel industry

If you quit reading this article now, you will have absorbed the vast majority of the points that I initially wanted to make on this subject.  If you have the time and wish to keep reading, in the following addendum I will provide the personal perspectives I have gained on the how the US steel industry was largely responsible for its own decline, a perspective which I developed over time living in what used to be one of the biggest steel producing areas in the country

In one of my economics classes I took to obtain an MBA, the textbook used the steel industry as a prime example of an “oligopoly”.  The professor explained that an oligopoly is like a monopoly, except that instead of only one company dominating an industry (a monopoly), in an oligopoly several big companies in the same industry work together to establish the same effect – primarily to control prices at very profitable level for all concerned.  In the case of the major steel companies, instead of colluding (getting together to set the prices of steel products which would be illegal due to anti-trust laws) the all of the other major steel manufactures let the third biggest steel producer, Bethlehem Steel, make all of the initial price changes and then the other steel producers would immediately follow suit. This is similar to all of the filling stations in an area setting their prices based on that of the lower priced competitors.

The result was that steel prices were stable and not subject to competitive price pressures which would reduce the profits for every company. And since the steel companies were not actually agreeing among themselves to set prices they could honestly claim that they were all simply responding to the price changes of a competitor and not illegally colluding.  However, the result was essentially the same as that experienced in a monopoly situation.  The prices of steel products were maintained at artificially high levels, above where they would be set in a true competitive environment.

US steel companies had no incentive under this pricing structure to adopt more efficient production techniques.  For example, since none of their US competitors were competing with them on price, why would they feel pressure to spend a lot of capital to install new, more efficient furnaces when their existing ones had ten to twenty years of useful life left in them.  In addition, after World War II the European steel making industry had largely been destroyed and other countries had not yet developed major steel making capacity. So the American steel companies didn’t have much completion abroad either and they were selling plenty of their high priced American made steel internationally.  The end result of all of this lack of competition is that American steel companies got fat, lazy and inefficient.

This general attitude of the US steel industry also carried over into its labor force to its detriment. Here in Birmingham Alabama, where I have lived for 40 years, I experienced this phenomenon first hand.

The Birmingham area is the only place in the entire world where all of the major ingredients necessary to make steel – iron ore, coal, limestone and dolomite – are found in one location.  Consequently, north central Alabama for many years was once one of the major steel producing areas in the country and the largest in the South. Steel companies were originally the biggest employers in the Birmingham area. The last of the areas steel production plants, US Steel’s huge Fairfield Works (9 miles from the center of Birmingham) at its height in the 1960’s employed 15,000 workers. After the company shut down the Fairfield plant’s last steel producing furnaces late 2015, only 900 remain working in its steel rolling operation.

I remember a conversation I had in 1978 or 1979 at a friend’s birthday party after a few beers with four or five US Steel employees who worked at the company’s Fairfield works.  They were the childhood buddies of my friend and had grown up in the Fairfield area.  At best they had high school educations.  I remember vividly how they bragged about how much money they made and tried to outdo each other with tales of how little they worked, protected as they were by union rules. One said he was a crane operator whose crane was used only about 10% of the time.  He related how since union rules dictated that crane operators only had to operate cranes, he spent the rest of the time in his crane doing nothing but day dreaming.

About a year later while I was taking an MBA class on labor relations, the professor arranged for the head of the local steel workers union to talk to the class.  The union leader spent most of his time bragging about all of the wage increases and the many employee benefits the union had negotiated with US Steel for its members over the years. Some of the benefits he described were so plush that I asked him whether he ever worried that those union contracts made labor so expensive that the company might not be able to continue to be competitive. He replied that was the company’s problem, not the union’s.

In retrospect, I realize now that with their oligopoly price setting capabilities, for the many years US steel producers had little incentive to drive hard bargains with their unions which might lead to temporary plant shutdowns and loss profits.  It was simple enough to absorb increased labor costs by increasing the prices of steel products. With no price completion there was no downside to that strategy.

Foot note:  I was reminded about the union leader’s lack of concern about the competitiveness of the steel companies three months later when US Steel shut down a major portion of their Fairfield operations which permanently cost the union two thousand jobs. It was the one of many layoffs to come.

The early virtually unnoticed stages of the downturn of the American steel industry began in the 1960’s. Europe and Asia countries, driven in part by the high price of imported US steel, began to develop and/or increase their own steel making capability to supply their own needs. Since in many countries they were virtually starting from scratch, they adopted the latest technology assuring that their costs were lower than their stogy American counterparts.  The exports of US steel slipped, some American steel jobs were subsequently lost. Then from 1974 to 1986 the American steel industry was mired in a depression caused in large part by economic downturns brought on by the OPEC oil embargo and later by the Iranian revolution and Iraqi invasion of Iran. During this period the demand for steel dropped to low levels making it very difficult to sell steel at the at the high prices previously enjoyed by American steel manufacturers.  The result was massive layoffs by American steel producers.

During the same period steel producers in other countries were also operating well under capacity and would have loved to sell their products at their lower prices to American industry and consumers. However, both the Carter and later the Reagan administration protected the American steel industry with quotas and other protectionist measures, though they stopped short of actually increasing tariffs on imported steel.  This protection gave the US companies no additional incentives to modernize their operations and make themselves more efficient. After the demand for steel recovered in the middle 1980’s, and government protectionist measures were no longer deemed necessary, the stage was set for foreign imported steel to take over a portion of the American market.

The point that I am trying to make here is that the American steel companies and their employees set the stage for the initial decline of the American steel industry with their inability to understand that their greed would ultimately be their undoing.

There is one more related subject that I want to address before leaving this subject.  Some conservatives will claim that one of the reasons for the decline of the US steel industry was the introduction regulations by the Environmental Protection Agency.  If that claim has any merit I can tell you from firsthand experience that those standards were desperately needed.

When I first moved to Birmingham in 1977 I remember complaining to my business colleagues about rotten eggs smell that I sometimes experienced on my way to work and the smog that sometime enveloped the city when it experienced temperature inversions and the pollutants produced by the nearby steel plants were trapped in the air of the city. They smiled and explained that was nothing compared to what the city residents had previously experienced.  They told me about the thick yellow orange smog that previous hung over the city, totally hiding the skyline on most days and how it was sometimes difficult to breath outside. They also told me how they used to bring towels to Legion field to wipe off the layers of accumulated soot off their seats before sitting down to watch Alabama football games.  So even before the late 1970’s environmental protection laws were starting to make steel making cities like Birmingham more livable.

What my colleagues at work at work neglected to tell me about was higher than normal cancer rate in the surrounding area, how people with afflictions like asthma and emphysema couldn’t go out at all when the smog was at its worst.  I also later learned that steel related industries had casually poisoned whole neighborhoods with their improper disposal of the toxic chemicals used in their manufacturing processes. The EPA eventually caught up with and started fining these polluters as well, but even today efforts are underway to remove soil laced with heavy metals and other industrial wastes from school yards and residential lots in the northern section of Birmingham where much of the steel industry was originally concentrated.

The making of steel from iron ore and the manufacturing steel products was for years a dirty business which required cities like Birmingham to trade the health of its citizens and their quality of life for economic well being. Regardless of any negative effects they might have had on the profitability of the American steel industry, environmental regulations were absolutely necessary to control the pollution which the steel companies would have never addressed on their own.

I even know of cases where US Steel was forced by environmental laws to replace their aging inefficient blast furnaces with the improved QBOP furnace technology long before they would have otherwise.  I found it ironic that not only did that action drastically cut down on pollution, it also made the steel making process much more efficient as well.  It would have taken many years for the company to make that type of improvement on their own.

Today, with all of the steel making furnaces shut down and only the remnants of its steel related manufacturing industry remaining, Birmingham’s air is relatively clean and its citizens are healthier.  UAB (the University of Alabama at Birmingham) and its world class research hospital long ago replaced steel making as the city’s and the State of Alabama biggest employer.  The city’s banking, medical research and construction industries are thriving.  The Birmingham area is also the home of one of AT&T largest data centers and consequently it is one of the city’s biggest employers.  The only people who miss the days when the city was covered by a near opaque yellow orange smog are probably some old steel workers whose jobs were lost to corporate and labor greed and more efficient competition.

Cajun    3/12/2018


One thought on “Raising Tariffs – A Stupid Economic Decision”

  1. An astonishingly bad decision by an astonishingly unfit President.
    This illustrates, yet again, that Trump knows not what he does, is incapable of nuance, acts on the spur of the moment, and rejects the advice of those who know the subject matter far, far better than does he himself.

    I found the second half of your excellent article to be about a subject near and dear to my heart; the complicity and complacency of our corporations in ignoring laws, setting prices, an illegality they do not seem to be called upon …

    As one who lives in California’s Central Valley, an agricultural mecca, so to speak, I am very familiar with the practices of those like Archer Daniels Midland who lead that industry into monopolistic practices. I will not go into the use of chemicals polluting our water table, mono-culture that is killing bees and the rest of the abuses that so typify American corporations.

    Times change, economies do as well. Our economy was once almost solely based upon manufacture, but is no longer. It is impossible for America to compete with hourly wages in emerging third world nations, with the lack of industry safeguards, lack of environmental protections and the rest that these nations use to attract industry.

    Despite Trump’s ill conceived pandering to laid off workers we will see no real re-emergence of our former industrial base and it s time we understood this fact. Instead of starting a trade war that will very possibly have a huge and negative affect upon the US economy, indeed, upon the worlds economy, it is time we understood that retraining and facing our new technology based economy is both the way to re-employ the laid off and is also here tostay.

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