The Limits of 'Made in America' Economics

Trump's widely anticipated steel tariffs are likely to end up hurting the heartland.

China Stringer Network / Reuters

The White House has branded this, the 29th week of the year, “Made in America” week. As part of the week, administration officials are promoting American products and outlining a strategy to roll back the North American Free Trade Agreement, arguing that their policies will boost wages for the middle class and create jobs in manufacturing communities. “We’re going to end up having a level playing field,” Trump said this week. “I don’t want to say anything more than level, but if the playing field were slanted a little more toward us, I would accept that also, okay?”

The most controversial part of this policy initiative—not yet announced, not yet certain, but widely anticipated—would be placing additional tariffs on foreign steel. “Steel is a big problem,” Trump told reporters on Air Force One, coming back from the Group of 20 meeting in Germany earlier this month. “I mean, they’re dumping steel. Not only China, but others. We’re like a dumping ground, okay? They’re dumping steel and destroying our steel industry. They’ve been doing it for decades, and I’m stopping it. It’ll stop.”

Many economists and industry experts agree that the United States faces unfair competition and artificially low prices that have damaged the domestic steel industry. But they don’t agree that a tariff is the right approach for addressing the problem. They argue that tariffs could backfire, hurting American businesses and workers without doing much to revive the Rust Belt.

Trump promised to restore the heartland with tariffs on imported goods during his presidential campaign, often in offhanded and extreme terms and often targeting China in particular. “They want our people to starve,” he said before becoming president, saying there was “no choice” but to start a trade war with the country. (He added that he would serve McDonald’s to the Chinese leader at any future state dinner. Earlier this year, at an actual state dinner, he served dover sole with champagne sauce and dry-aged steaks.)

In April, Trump ordered the Department of Commerce to investigate steel imports under a little-known part of the Trade Expansion Act of 1962, Section 232, which allows the executive branch to place import restrictions or tariffs on steel for national security reasons. “Steel and aluminum are vital for U.S. national defense and critical infrastructure,” Robert E. Scott of the Economic Policy Institute, a left-of-center think tank, said in a piece supporting the idea. “The military needs high quality steel and aluminum to make products ranging from helmets and tanks to rocket fuel, fighter jets and aircraft carriers.” Foreign trade practices have made it impossible for the United States to supply its own steel for defense purposes, the theory goes.

But many trade experts, as well as foreign countries and American industry leaders, have raised questions about applying tariffs on those grounds. Trump has been vocal about wanting to punish China, rather than stressing that the state of the domestic steel industry is a national security problem. Trade experts argue that using Section 232 to achieve a non-security objective would be a misuse of a policy meant for true emergencies and a violation of norms and trade law. The case is “likely to raise barriers that don’t meet the international legal standards of the World Trade Organization, leading to disputes at the W.T.O. and retaliation from trading partners,” argues Chad P. Bown of the Peterson Institute of International Economics, a Washington-based think tank.

Thus, retaliation by exporters hit by the tariff (likely China) and importers that would absorb the glut of steel no longer headed to the United States (the European Union, among others) seems a certainty. Numerous other countries have voiced their opposition to the potential Trump move for months. The Chinese government “believes there is no evidence that steel imports threaten to impair U.S. national security,” Yu Gu, a Chinese official, testified at a Commerce Department hearing earlier this year. “The United States’ defense and national security requirements are plainly not dependent on imports of foreign-made steel.” The E.U. has sworn to fight back if the Trump White House goes ahead and is reportedly already preparing measures, such as levies on American whiskey, rum, orange juice, potatoes, and tomatoes.

Facing the specter of retaliatory measures, any number of American companies and industries have warned the Trump administration against making the unusual maneuver. A huge collection of agricultural producers, for instance, has expressed concern about import prices, export prices, and other countries putting up trade barriers on flimsy national-security grounds. “The potential for retaliation from these trading partners is very real,” their open letter said. “It is also likely that the United States would not be the last country to cite national security concerns as a reason to restrict imports. In particular, many countries view food security as a legitimate national security concern. If a country as consequential as the United States can cite national security reasons to prevent imports of a sensitive product, others will do the same.”

Any trade barrier that kicked off a tit-for-tat would damage the American economy and the world economy, economists say. “A hypothetical trade war would lead to adverse outcomes in all major economies,” Brian Coulton, the chief economist at Fitch, the credit ratings agency, said in a research note. “The U.S. and the countries directly targeted by the imposition of punitive U.S. import tariffs would see the largest losses of GDP, but global repercussions would be significant, as business and household confidence falls, asset prices weaken, and trade flows are affected more widely.”

More narrowly, experts doubt that Trump’s tariffs would have the intended effect of helping the Rust Belt. It is true that American steel producers would benefit from higher prices, and steel stocks are already up considerably on the prospect. But there are far more manufacturing workers in industries buying steel than selling it, businesses that would suffer from higher input costs. This is not modeling or speculation. Back in 2002, President George W. Bush put tariffs of up to 30 percent on steel imports from around the world, causing domestic prices to spike. That led to about 200,000 people losing their jobs in manufacturing, one analysis found—more than were working in the entire steel industry. Every state experienced job losses, with Ohio, Michigan, and Pennsylvania among the worst-hit.

Thus, manufacturing businesses outside the steel industry are lobbying against the Trump tariffs too. “Inevitably, the imposition of across-the-board higher tariffs or other restrictions on imports of steel into the United States would only widen the existing price gap by increasing the price of U.S. steel and thus the cost of U.S.-built vehicles,” the Detroit car makers wrote in a letter to Commerce. So are economists. “Additional steel tariffs would actually damage the U.S. economy,” reads an open letter to Trump signed by the former Federal Reserve chairman Ben Bernanke and the Nobel laureate Joseph Stiglitz, among others. “Tariffs would raise costs for manufacturers, reduce employment in manufacturing, and increase prices for consumers.”

Why do it, then? The sense among trade experts is that Trump just wants to: He has long promised to attack countries that he perceives as having an unfair advantage, and wishes to do so in an attention-grabbing, poll-driving, and openly oppositional manner.

More broadly, Trump could be doing far more to aid manufacturers through measures such as infrastructure investment and workforce-development. “He has his program to make the United States competitive again,” said Harry Moser, the founder of the Reshoring Initiative, a group that promotes domestic manufacturing. “The things he wants to do are mostly the right things: lower corporate tax rates, less regulations, some kind of border-adjustment or value-added tax, that would help a lot. He’s started to show interest in the skilled workforce.”

But for now, Trump’s biggest trade move would likely come at the expense of a region he has made great promises to. In trying to punish China to help the heartland, Trump seems likely to hurt it.