The Trump Tariffs on Steel and Aluminum- by: Siddieq Noorzoy

Despite many objections by members of his own party, the Republican Party to the earlier reports that President Donald Trump

was going to impose tariffs on steel and aluminum and much  concerns by US trading partners around the world

President Trump announced a 25% tariff on steel imports and 10% on aluminum, while giving Canada and Mexico exemptions.

The argument for the tariffs used was ‘national security’ in the framework of “America First”. When the reports came out

on March 8, 2018, the many strong objections from many sources to the tariffs had been ignored by the Administration.

Then it was to the markets to react. Thus, the clearest signal of displeasure was that within the hour of the announcement

the Dow Jones Industrial Index fell by 300 points creating concerns among stock market traders that a trade war may follow

with China and even with European Union.

Historically the arguments for the protection of domestic industries through tariffs or quotas are not seen as legitimate except in the case of infant industries

where domestic firms are just starting and they argue they  need protection from foreign competition until they mature. The arguments

made by the Trump Administration for imposing the tariffs are not in this category since these industries are highly mature and open competition in

trade benefit other domestic industries that use steel and aluminum such as the auto industry which was not happy about the tariffs since

their costs will rise. Consumers will pay more for many products and no new investment is expected to take place in the steel and aluminum

industries in the US. And the threat from other nations following with their own tariffs will, if followed, will reduce world trade and reduce national income

and employment all around as happened in the 1930’s when the US imposed the Smoot-Hawley tariff of June 1932 during the Hoover Administration

with the notion to fight off the depression and high unemployment. Retaliations followed, US trade shrank and depression worsened.

All the arguments thus far made by the Trump Administration and others have been based on the concept of comparative static efficiently

where it has been argued that tariff protection raises the output and employment in the protected industry. This goes back to 1792 in the US when

Alexander Hamilton made an argument for tariffs for US industries. The argument became later known as the tariff argument for infant industry.

It is of interest to note that the stock price of US steel declined in the stock market following the tariff announcement. This may be taking as a signal by

the market that the announced increase in steel tariffs may lead to decreases in efficiency and productivity and decline in profits thus the falling interest by stock investors.

The Dynamic Arguments

All along tariff arguments have been based on comparative statistics where things are held constant for comparisons, which ignored the dynamic nature of events

and the arguments in a dynamic competitive world and the fact that we work in a changing world which cannot be held constant.  

Building a theoretical model around these concepts some time ago, and an econometric model to capture the theory it was argued that losses in competitive market forces work in ways

that increases in tariffs will lead to losses of productivity and output and decreases In tariffs are expected to lead to gains in productivity through gains in efficiency

and thus lead to greater  output. The available statistical data for testing these arguments were confined to the case of reducing tariffs during the Kennedy Rounds of tariff reductions in 1967-72.

Taking statistical data for 40 Canadian products-industries and in another study taking 100 products-industries for the US for this period the argument for the dynamic tariff changes were tested.

The results largely supported the dynamic theoretical arguments that reductions in tariffs had resulted in gains in efficiency, productivity, and output for the period of tariff reductions.

Steel and steel products were included among the Canadian industries and aluminum and steel were included among the US sample of statistical data.

The study with the Canadian data was published in the article:

Tariff Reductions and Gains in Efficiency: Some Evidence from Canadian Data, Economics Letters, ( North Holland) March 1979, pp. 51-57.

Two other studies on the topic with US data are: Tariffs, Production Patterns and the Gains from Trade, Research Paper No. 79-2, Department of Economics, University of Alberta

Edmonton, Canada. Presented at the Atlantic Economic Association meeting, Paris, 1983. Abstract was  published in the Atlantic Economic Journal, Vol. 6, No. 3 1983.

The second study on the US was: Trade Related Output Changes in the US Manufacturing Industries: The Dynamic Effects of Tariffs, Research paper No. 86-1, Department

of Economics, University of Alberta, Edmonton, Canada January 1986. Abstract was published by the World Bank in the Research Inventory for Multilateral Trade Negotiations,

Washington D.C. 1988.

A GENERAL CONCLUSION ABOUT THESE TARIFFS IS THAT THEY WILL LEAD TO REDUCED TRADE, REDUCED LEVEL OF COMPETITION AND EFFICINCY , HIGHER COSTS

FOR PRODUCERS AND CONSUMERS AND EVEN IN THE ABSENCE OF RETALAITIONS FROM OTHER COUNTRIES THE RESULTS WILL NOT HELP THE US ECONOMY AS ARGUED FOR THESE TARIFFS.

 

  1. Siddieq Noorzoy

Professor of Economics, Emeritus

Department of Economics, University of Alberta

Edmonton, Canada

SNoorzoy@msn.com

Residence: Bay Area, California

 

CBS

Trump announces new tariffs on China, asks for reduced trade deficit

Last Updated Mar 22, 2018 4

President Trump signed a memorandum Thursday directing the U.S. Trade Representative to impose an estimated $50 billion in tariffs on China, which will go into effect in at least 45 days.

“We have spoken to China and we are in the midst of a very large negotiation,” Mr. Trump said. “We will see where it takes us. In the meantime, we are sending a Section 301 action.”

Mr. Trump said he has asked Chinese officials to immediately reduce the U.S. trade deficit with China by $100 billion.

Mr. Trump also made news at the end of the event, when he told reporters he still wants to testify before special counsel Robert Mueller.

“Yes,” Mr. Trump said, according to the White House press pool. “I would like to.”

The tariffs will target what White House trade adviser Peter Navarro described on a conference call with reporters as China’s market distorting and “discriminatory practices” to steal American intellectual property and unfair technology transfers.

Deputy director of the National Economic Council Everett Eissenstat, who was also on the call, said that USTR will publish a “long list” of proposed Chinese imports within 15 days. A notice and comment period will then open up for stakeholder input.

The Treasury department has until 60 days from memorandum’s signing to submit recommendations for a final list of tariffs.

The tariffs, senior officials say, will be designed to offset “the gains that the Chinese have received through unfair trade practices.”

The memorandum will also direct the Treasury department to make recommendations on restrictions to Chinese investments to the President within 60 days. While the tariffs will be imposed unilaterally, Eissenstat also said that Mr. Trump will direct the World Trade organization to “address China’s discriminatory licensing practices.”

White House officials did not specify which products will be targeted by the tariffs but the stock market opened lower on on Thursday morning with investors worried that Mr. Trump’s actions will trigger retaliatory actions from China.

The Wall Street Journal reported on Wednesday that China is already preparing measures to hit back at the U.S. by targeting U.S. agricultural exports like soybeans and hogs.

Navarro claimed the administration has tried “very, very hard to work with the Chinese.

“Trump did his due diligence in inviting the Chinese to the Mar-a-Lago process and engaged and we went all the way to August trying to resolve these issues through dialogues,” Navarro told reporters.

 

On Monday, Wal-Mart, Target, Macy’s, Best Buy and other major retailers released a letter urging the President not to impose tariffs on China arguing that they could “punish American working families with higher prices on household basics like clothing, shoes, electronics, and home goods.

The U.S. Chamber of commerce also pushed back back in a statement over the weekend to say that tariffs are “damaging taxes on American consumers.”

A White House official said that while stakeholder input is “important and valued,” dialogue with the Chinese over the past 15 years has been fruitless.

“China has been well aware of these concerns for many many years so the president has decided that now is the time to take decisive actions,” the official said.

 

U.S. trade representative announces there will be investment restrictions on China

U.S. Trade Representative Robert Lighthizer announced there will be some investment restrictions on China, related to intellectual property rights issues.

 

“The era of economic surrender is over,” Pence says

Vice President Mike Pence said the president’s action makes things clear.

“The era of economic surrender is over,” Pence said.

 

Trump says U.S. now has $800 billion trade deficit with the “world”

Mr. Trump said the U.S. now has an $800 billion trade deficit with the “world,” and China represents more than half of that.

 

“We’ve had this abuse,” Trump says of trade relationships

Mr. Trump said the U.S. has “had this abuse” on trade, from many nations — even nations that have ganged up against the United States.

rump says he’s asked China to decrease trade deficit by $100 billion immediately

Mr. Trump said he’s spoken with Chinese officials, and asked them to decrease the U.S. trade deficit with China by $100 billion immediately.

“The word that I want to use is reciprocal,” Mr. Trump said.

 

“It’s just not fair,” Trump says

Mr. Trump said the U.S. relationship with China on trade is ” just not fair.”

 

“I have tremendous respect for President Xi”

Trump says they’ve lost 60,000 factories

“Closed. Shuttered. Gone,” Mr. Trump said of U.S. factories.

http://money.cnn.com/2018/03/22/news/economy/china-trade-war-trump-tariffs/index.html

 

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