The imposition of tariffs by the Trump Administration has left businesses, consumers and workers guessing. Tariff levels can have far-reaching effects both at home and abroad. As such, raising these duties can make or break businesses and households all over the world.
Now, many wonder how to react to these steel and aluminum tariffs. While the duties themselves shifts benefits and costs, the real effects depend mostly on the negotiation skills of Donald J. Trump.
Free Trade Theories Have Driven Policy for Decades
The United States has always experienced a complicated relationship with tariffs. Before the New Deal, these trade duties served as the government’s primary source of revenue. However, since the 1980s, the U.S. has focused on “free trade.”
The first deal with Canada came in the 1980s. That agreement included Mexico in the 1990s and became known as the North American Free Trade Agreement (NAFTA).
Those who have taken an Economics 101 course are taught that free trade increases productivity by allowing countries to produce the goods they can supply most efficiently. In theory, the country can export their specialty goods and import what they cannot produce efficiently. People can also enjoy the highest standard of living since they pay the lowest possible prices for said goods.
However, in practice, this led to high-wage jobs disappearing in areas such as metal or auto manufacturing. New jobs in other industries did not emerge in many cases, and millions of workers suffered as a result.
Some have alleged that countries also dumped goods on to the American market at artificially low prices. This was done in hopes of putting U.S. firms out of business, giving the surviving foreign companies more power to raise prices.
Trade Policy Has Helped to Define the Trump Presidency
It is also this “dumping” that prompted Donald Trump to take more of an anti-trade stance in the 2016 election campaign. Mr. Trump promised to impose tariffs in an attempt to bring these jobs back.
Many believe this issue helped Mr. Trump break the so-called “blue wall,” the Democratic Party dominance in many Midwestern states that rely on manufacturing. Indeed, Trump could not have won the election without carrying “blue wall” states such as Michigan, Pennsylvania and Wisconsin.
Now, President Trump appears to be keeping that promise. He announced tariffs of 25% on steel and 10% on aluminum. Assuming the steel and aluminum tariffs hold, they will benefit producers of the goods in question. Firms such as Alcoa Corp (NYSE:AA) and United States Steel Corporation (NYSE:X) will profit.
These costs will likely be passed on to consumers, and sales will probably fall. However, as to how much this will increase prices, the short answer is, “it depends.” Specifically, it depends on Trump’s negotiation skills.
Looking Beyond Steel and Aluminum Tariffs
Ever since his days in real estate, Trump has built a reputation on his negotiation skills. The prospect of lower sales numbers due to tariffs will attract the attention of America’s largest trading partners.
Hence, the threat of these import taxes could become a negotiation ploy to extract more favorable trading terms from China, Mexico and other trading partners. If such a strategy succeeds, the steel and aluminum tariffs will become temporary, and consumers will see few changes in prices.
Consumers should also understand that Trump’s message has been “free and fair trade,” not one-against-all trade.
In fact, Trump’s Director of the National Economic Council Larry Kudlow has spoken in favor of free trade for decades. He had also criticized some of Trump’s trade policies prior to joining his administration. Likewise, Commerce Secretary Wilbur Ross describes himself as “pro-sensible trade.” So, observers should not assume an intent of high tariff barriers.
However, if the president’s strategy fails and the disputes devolve into a trade war, consumers should expect much higher prices, and possibly a shrinking economy.
Many believe the higher tariffs imposed by Herbert Hoover in the early 1930s became the most significant factor in causing the Great Depression. Whether a depression scenario would play out again remains unclear. Still, if one retaliatory tariff increase leads to another, both markets and American workers will face serious challenges.
Final Thoughts on the Steel and Aluminum Tariffs
The effects of steel and aluminum tariffs depend on the negotiation skills of President Trump. Put simply, the likely imposition of the trade duties bodes well for producers and poorly for all who consume aluminum and steel.
However, the true effects of such tariffs could easily reach beyond those import duties. Trump probably imposed these tariffs to give the U.S. more negotiating power on trade agreements. If Trump can gain most of the desired concessions, consumers should expect only minimal and temporary effects from the tariffs.
Still, the most significant concern lies in the failure of the tariffs. If these duties lead to a vicious cycle of retaliatory tariffs, Americans will experience more profound consequences than higher steel and aluminum prices.
Hence, markets should not worry so much about steel and aluminum tariffs, but on how Trump plays his cards.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.