President Donald Trump is taking heat from all sides on this one.
Last week, he announced a 25 percent tariff on steel and a 10 percent tariff on aluminum. For the time being, Canada and Mexico have been excluded from these tariffs as NAFTA is undergoing renegotiations, but that could change.
The issue is China and a few other bad actors that have been subsidizing their domestic steel and aluminum production, to the point where they have much more than they need. They then export this excess capacity, depressing steel prices and driving United States manufacturers out of business.
A country that is subsidizing manufacturing to gain an unfair advantage — does that sound familiar?
Back when European Aeronautic Defence and Space was competing for the U.S. Air Force’s $35 billion refueling tanker contract and had planned to assemble that aircraft in Mobile, EADS competitor Boeing cried foul. In the middle of the contest, the World Trade Organization declared the European governments had given EADS’s Airbus illegal subsidies, and therefore EADS had an unfair advantage against Boeing.
EADS won the first round of bidding to supply the new tanker, but Boeing filed a protest claiming irregularities in the bid process. Boeing got another shot at it, and with a cloud of illegal subsidies and a new set of bidding rules, Boeing emerged victorious in 2011.
(Update: Seven years later, it’s not going particularly well for Boeing, as the Washington State-based contractor is consistently missing deadlines and incurring billions of dollars in cost overruns.)
The point is back then, the specter of illegal subsidies by a foreign government was a significant enough concern for many of the same people poo-pooing Trump’s actions now to demand action.
Back in 2006, Washington State senior U.S. Sen. Patty Murray, also known as “just a mom in tennis shoes,” cried foul over the alleged subsidies EADS was receiving and demanded the Bush administration take action to curtail the unfair advantage EADS had over Boeing.
Trump’s tariffs elicited nearly the opposite response from Murray last week.
“President Trump’s reckless proclamation to impose broad tariffs, against the wishes of his own economic advisors, is alarming,” she said in a statement. “Perhaps no state stands to lose more from Trump-inflicted price increases and a trade war than ours. The inevitable retaliation will hurt growers across our state, drive up the costs of houses, cars, and everyday goods, and jeopardize our state’s economy.”
Perhaps if the steel industry had a more prominent presence in her state than the prized aerospace manufacturer Boeing, she would have seen things differently.
Trump’s pushback on the right comes from primarily two parties — the Never Trump types who oppose the president because he is Donald Trump and those who operate in an ideological world where absolute free trade is the best.
The former is a psychological issue. The latter, much like the conservative purists’ counterparts on the left, does not account for human behavior. Sure, in theory, if the entire world operated on a free-trade basis, then the market could dictate the price of steel, aluminum and everything else in the world.
But the world doesn’t work that way. Most other countries are looking to game the system in a way that benefits their people, their government or their oligarchs.
We do not live in a world where free trade always prevails. We do not even live in a world where nations always acknowledge the international rules on trade.
In this world of global economics where the rules tend to be guidelines, if not tariffs, then what is an appropriate response? Or do we just do nothing and allow the Chinese to flood the global market with cheap steel and say to heck with our steel manufacturing capacity? If the Chinese want to own the world’s steel industry and can produce it cheaper, then they can have it. Steel is nasty business anyway. (Anyone who remembers the peak of the steel industry in Birmingham can attest to this.)
The fear is if the U.S. did that, then if the time ever came where the country, God forbid, had to go to war against China, it would be unable to produce certain armaments that required steel.
What would be an acceptable alternative to tariffs? Some argue the Trans-Pacific Partnership would have given the U.S. and other Pacific Rim countries leverage over China to discourage it from manipulating the steel and aluminum market.
These trade agreements have left many Americans with a sour taste in their mouths. They were promised economic prosperity. Then they wound up with depressed manufacturing wages and shuttered factories. You will have to forgive the American people for not rallying to the support of these so-called free trade agreements.
Is there ever a time when tariffs are an appropriate measure?
Tariff detractors often like to point to the Smoot-Hawley Act and former President Herbert Hoover. The argument: We enacted tariffs and next thing we know, it was the Great Depression.
That may not be the best comparison for opponents. Globalization was not a prevailing force in economics. Also, Smoot-Hawley was intended to raise revenues for the federal government.
Trump is dealing with other nations’ policies impacting domestic economics, and he’s not imposing tariffs as a revenue-collecting measure but as one that penalizes unfair trade practices.
In a perfect world, Adam Smith’s vision of free trade would inspire competition and nations would be motivated by self-interest and achieve prosperity much more efficiently than government-regulated trade.
Countries have figured out that when you pair the power of government with self-interest motivation, the theory of free trade doesn’t always prevail.
That’s why Trump’s tariff proposal has merit and deserves consideration.