President Bush, who ran on a platform of eliminating “tariffs and terriers” that restricted international trade, has ceded to political pressures and imposed tariffs on a significant proportion of U.S. steel imports.
This is a bad economic policy, and the president’s advisers, including U.S. Trade Representative Robert Zoellick and his economics guru Lawrence Lindsey, know this and undoubtedly have expressed their opinions.
But the president apparently also decided that it was politically necessary.
Many steel industry workers are social conservatives who increasingly vote Republican but who may easily revert to their Democratic roots if they feel that a Republican administration stiffed their requests for aid.
The important lesson here is that tariffs, quotas and other trade restrictions are imposed for political reasons, and not economic ones.
Similarly, the most immediate international responses to the new tariffs will be political.
The European Union, Japan and China will respond, with the EU being the most likely to take their objections to the World Trade Organization and having the greatest power to retaliate with or without WTO approval.
It isn’t clear which U.S. export sectors will be hit, but some retaliation is inevitable. In an early move that may hurt Minnesota poultry producers, Russia imposed a ban on imports of U.S. chicken, but asserted unconvincingly that this had nothing to do with the Bush steel tariffs.
The new tariffs also drove a stake through the heart of any Free Trade Area of the Americas for the foreseeable future. The adage that Latin America really doesn’t count for much in U.S. policy circles once again is proven true.
Moving beyond the political consequences, the economic ones may not be all that visible, especially in the short run.
The tariffs will slow steel imports from the affected exporting countries and there may be some abatement of layoffs and bankruptcies in U.S. steel and iron ore firms. Northern Minnesota iron ore mines that might otherwise close will stay open. Ore shipments from Duluth, Two Harbors and other Lake Superior ports will not fall as much as they would have without the tariffs.
But relief to the Iron Range will be limited by the fact that imports of slab steel, largely from Europe for further finishing in the United States, were not restricted as much as miners had requested.
Such steel — imported by the same large steel firms that have demanded tariffs on finished steel as an alternative to making their own — makes up about 30 percent of all U.S. imports. These are the intended outcomes of the tariffs and the ones that will bring political benefits. The unintended consequences will be less visible and hence will have less political impact.
The price of steel will go up, a fraction of a cent for every soup can, a dime for every rebar in a state highway or the foundation of a new house, a hundred dollars or so per new automobile and perhaps $20,000 on a new BNSF locomotive.
Most households will pay more for the things they buy, but few consumers will be able to tell you how much they are affected.
The economic evidence is also pretty clear that the jobs saved in steel mills will be offset by job losses in firms that use steel.
An extra $50 to $100 per ton of steel in a 50-ton crawler tractor will boost the price by as much as $5,000. This won’t put Caterpillar out of business, but at the margin they will lose some sales to Komatsu or Fiat or other competitors.
So will John Deere and so will the barge builders on the lower Mississippi who are trying to sell their products to move Brazilian soybeans down the River Plate.
These layoffs will not be dramatic. No company will go bankrupt. But many companies will see somewhat more sluggish sales than they would if they could get lower-cost steel.
Last, and probably least, the tariffs will generate some revenue for the federal government. Tariffs are a tax, one that ultimately is paid by consumers. The 8 percent to 30 percent tariffs imposed on some steel imports will be paid into the U.S. Treasury by whoever brings the steel through U.S. customs.
Such tariff receipts are minor however, and probably will be offset by lower income taxes paid by the firms and workers adversely affected by higher steel prices.
On balance, the new tariffs are bad for the United States. They hurt the efficiency of the economy. They raise prices to consumers. They alienate key allies at a time when we seek their support for foreign policy and defense purposes.
But economic policies inevitably are made in a political environment and economists realistically could hope for little better from an administration that seems to lack any deep economic principles and is spooked by the possibility of electoral losses in November.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.