Relying on a rarely used section of United States trade law, President Trump announced a second round of new tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s, after approving the first tariffs of his presidency this January. After much confusion regarding the timing of the announcement, the president said on Thursday afternoon the U.S. plans to impose tariffs on steel and aluminum imports, with a formal order coming next week. The tariffs are likely to cause harmful effects for many in the economy.
The recommendations to impose these tariffs came from a Commerce Department review of steel and aluminum imports requested by President Trump. The review concluded that imports of these metals pose a threat to national security, a finding which gives the president authority to impose tariffs or limit imports through other means. Curiously, a Department of Defense (DoD) memo supporting the report said “the U.S. military requirements for steel and aluminum each only represent about three percent of U.S. production. Therefore, DoD does not believe that the findings in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.”
A quick review of tariffs. They are, you will recall, a form of excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. that is imposed on goods produced in other countries in order to increase the consumption of goods manufactured at home. They have this effect because they raise the price of foreign goods relative to domestic goods, pushing consumers toward domestic goods. So, for consumers, tariffs are like sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es in that they increase prices.
In the report, the Commerce Department gave the president three options for reducing imports of both types of metals: a global tariff, a high tariff on a select number of countries plus a quota on imports from all other countries, or a quota on imports from all countries. The president announced tariffs of 25 percent for steel and 10 percent for aluminum, both slightly higher than the minimum percentages suggested in the report. These new tariffs add to the 169 measures already applied to steel imports and the two placed on aluminum imports. He did not provide details to say whether any trading partners would be exempt.
It is worth mentioning again that the last time a U.S. administration placed tariffs on steel imports, in 2002 (using another rare section of trade law authority), the World Trade Organization ruled against the United States. Though that measure was withdrawn, one study quantified that during the short-lived tenure of that steel tariff, 200,000 Americans lost their jobs as a result of higher steel prices.
Much of the current administration’s rhetoric has focused on boosting domestic production, but it has largely ignored how these tariffs would impact prices, related industries that use aluminum or steel as inputs, or consumers who would have to pay higher prices for items ranging from aluminum foil to new cars. There are real concerns that placing tariffs on steel and aluminum would damage economic growth and invite retaliation that could extend to other commodities, such as agricultural produce.
At home, tariffs result in higher prices, making it more expensive to manufacture and consume products made with steel and aluminum. For example, the American Automobile Policy Council has said that such policies would lead to higher prices for steel and aluminum here in the United States compared to prices paid by global competitors, placing the U.S. automotive industry at a competitive disadvantage. Likewise, many other industries have expressed concerns that higher prices caused by tariffs will jeopardize the viability of domestic production.
Abroad, even though U.S. trade law authorizes the president to impose tariffs if imports are determined to endanger national security, doing so is likely to invite legal challenges from other countries and alienate our trading partners. The Department of Defense memo acknowledged the risk of these tariffs, citing concern “about the negative impact on our key allies regarding the recommended options within the report.”
One of the keys to making good policy decisions is looking not just at the intended effects of a policy on one group, but also at the possible unintended effects on others throughout the economy. Both tariffs are the result of reviews of unfair foreign trade practice. However, it is crucial for decision-makers to consider not just how tariffs will impact the intended groups immediately, but also how they affect all groups, including consumers and other industries, in the long run. It is likely that any benefits that could come from these tariffs will be outweighed by far more negative consequences for downstream manufacturing companies, consumers, and other sectors in the economy.