President Donald Trump’s announcement that he plans to impose tariffs of 25% on steel imports and 10% on imported aluminum is the first major economic policy error of his presidency.
What is the president’s motive? I firmly believe that Mr. Trump’s primary goal as president is to help American workers. Both his tax cut and his regulatory rollback were done for that reason, and workers are benefiting. By contrast, tariffs would not help workers but would cause other problems.
Let’s start with basic economics. A tariff is a tax on imports. That tax is paid by every American who buys the now-more-expensive product. A higher price for one good means less money to buy other goods. This is not a formula for prosperity.
Proponents of tariffs say, “Yes, American consumers have to pay higher prices, but American jobs will be saved.” That is incorrect. The problem isn’t just a tradeoff between American consumers and American workers. Earlier tariffs on steel did, in fact, save jobs in the American steel-producing industry, but destroyed many more American jobs in steel-using industries. Tariffs don’t save American jobs; they merely redistribute where the jobs are lost.
One final comment on the economics of tariffs: In 1850, Frederic Bastiat wrote in his classic essay, “The Law,” that tariffs are a step toward socialism. In his words, “protectionism, socialism, and communism are basically the same plant in three different stages of its growth.” All three call for government to intervene in the marketplace to influence who gains and who loses.
Now let’s look at the geopolitical implications of tariffs. The tariff proposals spooked the stock market. This surprised no one who knows history. In 1930, the stock market was recovering nicely from the 1929 crash until President Herbert Hoover signed the Smoot-Hawley Tariff Act. The stock market plunged, a trade war erupted, and the country slid into the Great Depression. At a minimum, implementing Trump’s tariffs could slow our economy; at worst, with retaliation from abroad, the tariffs could negate all the economic gains that Trump’s other policies have generated.