Monday, March 5, 2018

Bernstein: Trump’s tariffs: We’re missing the bigger picture

Here in D.C. Friday morning, even the howling wind seems angry about President Trump's new tariffs on steel (25 percent) and aluminum (10 percent) imports. Every single analysis I've seen so far warns of price increases, trade wars, job losses, falling stock prices, hits to the macroeconomy, and a threat to the global order.

I share many of these concerns. But I also fear we're all quite remarkably still missing something: Even after Trump's upset victory, Brexit, and the global rise of a populism nostalgic for a bygone era and industrial mix, political and economic elites still refuse to acknowledge and deal with those hurt by trade and globalization.

No question, these tariffs are a crude tool in that regard, likely to hurt more than they'll help. But what has the dominant policy community offered in their place? Huge tax cuts for corporations and wealthy heirs, share buybacks, and proposals to slash the safety net. Tax cuts for the rich; work requirements for the poor.

This is a policy agenda that directly violates the fundamental rationale for free trade: Yes, trade creates winners and losers, but the benefits to the winners are large enough to more than offset the losses to the losers. American economic/social policy, even after all that's transpired, still gets the first part right: more trade. But not only do the winners fail to compensate those hurt by trade, they use their winnings to buy politicians and policies that consolidate their gains while further penalizing those left behind.

Then, when our generally faux populist president actually takes a rare step, albeit misguided, to allegedly help these folks on the wrong side of globalization, all we hear is Econ 101 shouting about the distortions caused by tariffs. Like I said, I agree with much of that shouting, but colleagues, I ask you this: What else have you got?! Because if that's all we're bringing to the table, then we need to go back into our offices, shut the door and think a lot harder about a policy agenda to help lift the left behind.

I'll get back to that in a moment, but first, allow me to join the shouting. The thing about steel and aluminum is that they are "intermediate goods," i.e., inputs that show up in everything from beer cans to airplanes. Producers of these final goods will try to pass the tariff along to consumers, meaning prices will rise on a lot of what we buy. Prices will not go up 25 percent (in the case of steel), because it is one of many inputs in final products, like cars and buildings. But those marginal price increases could reduce consumer demand for a lot of products, with commensurate implications for jobs.

Second, with any tariff, even a narrowly targeted one on, for example, some low-level grade of rubber tires, the globalization cheering squad shouts "trade war!" They've seriously overplayed this hand because such narrow tariffs are extremely common, and countries engage in them all the time while continuing to engage in robust trade.

But these tariffs are not at all narrowly targeted. They apply to Chinese steel, which is legitimate in the sense that it is often underpriced, as well as steel from everywhere else. And China is not even in the top 10 of the countries from which we import steel (it is for aluminum). Most of our steel imports hail from Canada, Brazil, Mexico and South Korea; China accounts for about 2 percent of the total.

So, when close allies such as Canada talk about retaliation in this context, as they already have, they may well mean it this time. I'm much less worried about China, although I expect countervailing tariffs from them, probably on some of our agricultural exports. But given the broad scope of Trump's action, widespread retaliation feels like much more of a possibility this time around.

So, while these tariffs might pump up domestic steel and aluminum production — there is significant unused capacity in both sectors — their net impact on the economy, depending on how long they remain in place, could range from slightly negative to worse than that.


But that's a partial and incomplete analysis. What matters here is not just economy, but political economy. Readers of this column know I've had almost nothing good to say about this president's economic policy agenda, as he betrays his working-class constituents at almost every turn. But there should be no question that he masterfully tuned in to their anxiety and its linkages to globalization in a way that blew the lid off the denial of the fundamental flaw in U.S.-style globalization — winners failing to compensate losers — long practiced by elites from the center left to the center right.

And yet, even after that lid was blown off, there's still no coherent policy agenda that's been articulated to help connect those who've been left behind. Instead, we hear endlessly about the stock market, trickle-down tax cuts, health "reform" that takes away what precarious coverage folks have, budgets that slice away at training programs to help displaced people regain a foothold, threats to the safety net and the social insurance programs designed explicitly to provide a backstop against poverty, ill-health and market failures.

So, to everyone complaining about these tariffs, myself included, I have one simple request. After you've vented about their economic distortions, put forth the policy initiative you think is needed to help those hurt by trade. Absent that, you may have the economics right, but unless you get the political economics right as well, it's not just that your analysis is incomplete. It's that it may well make things worse.

John Case
Harpers Ferry, WV

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