There was anger in a recent reader email: “Saddam Hussein thought if he lashed U.S. POWs to the front of his T-62s, he could drive to Jerusalem without taking fire. Now Cadet Bone Spurs has lashed U.S. farmers to his tank as he roars into a trade war he thinks will be ‘easy.’”
That is a harsh and imperfect metaphor, but farmers should be alarmed. As stewards of one of the U.S. sectors most dependent on exports, they indeed are likely to be hurt if we get into an “easy” trade war. Moreover, Minnesota’s strong medical device industry, Polaris’ ATVs and snowmobiles and firms like 3M with complex product lines all are vulnerable.
However, in contemplating trade policy, issues go far beyond the most vulnerable immediate targets of retaliation. True, these is an immediate, conspicuous effect; but less salient harms can run deeper.
Let’s briefly cover those first, working backward.
At the very worst, a trade war becomes global. When the Smoot-Hawley tariff of 1930 touched off a tit-for-tat trade war that imploded the world economy, and deepened the U.S. Depression, small countries like Finland and Peru didn’t change their trade policies. But as total global output shrank, these nations fell into poverty nevertheless. Even 90 years ago, nations were so interlaced economically that none could escape.
When only two countries are involved, as in a trade war between Italy and France in the late 1800s, the entire economics of the two suffer. Both had lower output and less use of labor than they would have had if they had not gotten into tit-for-tat tariff raises. With less output and less employment, living levels were lower than they might have been. People were poorer, whether or not they themselves produced or consumed a particular product that was subject to tariffs.
A country can put itself into a slump unilaterally by simply raising tariffs even if no one bothers to retaliate. Argentina in the 1940s and 1950s, under the leadership of Juan Peron and his successors, closed itself off and stagnated for decades. After 1815, the Netherlands, which had been the highest-income nation in the world for most of the 1600s and 1700s based on world trade, shut itself off and stagnated. In both cases, the stagnation was economywide and not just in import- or export-related sectors.
In the situation we face now, with President Donald Trump last week enacting new tariffs on steel and aluminum, the population as a whole will be affected, but the degree to which the entire economy is retarded depends on how wide and deep and ongoing any tit-for-tat is.
Initially, manufacturers or constructors that use steel or aluminum will see higher prices. The price rises will not be higher by exactly 25 percent and 10 percent in response to tariffs at these levels. It all depends on the elasticities of demand for these raw materials and the products they go into, the shape of the supply curves of companies using the materials and other complex factors. Clearly the price of these inputs will rise. The actual tariff rate would be the maximum possible increase, but usually it will be lower.
The U.S. steel industry is not dead. We still produce nearly three times as much as we import. Nor is any company forced to use imports. Most user firms buy a mix of domestic and imported that varies with price and availability. As tariffs give domestic producers more pricing power, domestic producers will be able to raise prices to some degree. So all steel using companies will face higher prices regardless of what mix of sources they have.
These higher cost inputs mean finished products must cost more. The percentage increase down the line depends on how big a fraction of total production costs the input is. Take a producer of a small intricately machined component for some other manufacturer. The quantity of steel or aluminum is small and the cost of the machine and operator time is great. The raw material may only be 5 percent of the cost of the product. Obviously, a 10 percent or so increase in the steel will have little impact on raising the price of the finished component.
But for a manufacturer of chisel plows, where the four tons or more of steel in the implement is a big cost relative to the metal sawing, welding wire and welder’s time required to fabricate it, the same 10 percent increase in steel cost will cause a larger increase in product price. And a fabricator of structural steel for buildings and bridges, for whom the raw steel is a very large factor, might see an increase in product cost close to the increase in steel cost.
Now we face a complication. If we impose a tariff on steel, do we also impose one on imports of steel-containing finished goods? If the U.S. manufacturer of the little machined component sells to customers who could source it in Taiwan and that trade is untouched, he may lose the sale. A U.S. manufacturer of aluminum baseball bats really won’t be affected by an increase in aluminum costs as long as everyone else who makes them faces the same increase. However, if the domestic bat producer must pay more for the metal in it, but sporting goods retailers can also source such bats from China with no change in tariffs, then the U.S. company faces a problem.
Producers of non-traded goods dodge this bullet. A concrete contractor building foundations for high-rises, manure tanks for large hog farms, or foundations for wind turbines will have to pay more for the enormous quantities of rebar used. But all of his competitors who might bid on the same project are in the same boat. No one can import a finished turbine foundation from Brazil.
Note that state and local governments spend a lot on construction. So an immediate effect of a 25 percent tariff on rebar would be that fewer roads, bridges, municipal parking ramps or schools will be built than we could have without a tariff.
Now Trump is right that a tariff on steel will increase employment in U.S. steel production and in the companies that supply inputs. But people in steel-using companies will experience layoffs. Past history tells us that the losses exceed the gains. Studies of the “emergency” steel tariffs imposed by George W. Bush early in his administration cite an increase of some 33,000 workers in steel production and a loss of some 200,000 jobs in steel-using industries. Take these with a grain of salt, but they give an indication of the general magnitude.
So far, we are looking at the effects of imposing tariffs with no retaliation. With none, farmers would feel no effect other than paying more for implements and to have livestock and grain facilities built.
But there will be retaliation. And as one of the most prevalent U.S. export sectors, farmers are a very visible target. Other nations’ leaders know that farmers have political clout far beyond their numbers in the population. The EU rhetorically targeted Harley-Davidson to needle House speaker, Wisconsin Rep. Paul Ryan, and boubon to rile Kentucky Sen.Mitch McConnell. Soybeans exports are important to many in Congress.
Trump’s threats to “tear up” NAFTA are already motivating Mexican feed buyers to start ordering corn and soybeans from Brazil and Argentina rather than from us. That could accelerate. China buys large quantities of grains and oilseeds here plus dairy products and processed pork. An economy like China, still with great central direction, can quickly shift buying to other countries.
Nor is ag alone. Our country dominates medical-device manufacturing worldwide and these make up a big chunk of Minnesota exports. But we don’t always have pure monopoly. Germany, Japan and others are in the game too. Countries hit by our metals tariffs can direct their purchases of medical technology to these other sources. Where there are no others, they can impose a tariff and then invite U.S. manufacturers to open a factories behind this new protective wall. This has happened with other technologies in the past. Thus, an import barrier serves to move jobs in another sector overseas.
Nor are our hostages limited to ag and medical. The Census Bureau’s tabulation of the top 25 Minnesota exports in 2017 lists “PASS VEH FOR SNOW; GOLF CARTS & SIMILAR VEHICLES” in 11th place and “PASS MTR VEH, SPARK IGN ENG, NOT OV 1,000 C” in 22nd. In other words, snowmobiles and ATVs. Then there are “PLATES, SHEETS, FILM ETC, PLASTICS, SELF-ADH” in 6th place, “ADHESIVES BASED ON RUBBER, POLMR” in 21st and “SHEETS AND PLATES OF POLARIZING MATERIAL” in 25th. People who work for a certain operation headquartered in Maplewood should be able to figure out what this means.
Riding on the front of a tank gives you a clear view of things. That is fun as long as you are at Camp Ripley, but gets hairy quickly when HEAT rounds start coming your way.