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Tuesday, March 6, 2018

Trump's Tariff Proposal a Bad Idea

I agree with Peter Schiff from a purely economic standpoint. Tariffs (taxes) on imported steel and aluminum will drive the domestic price of steel and aluminum higher by the amount of the tax. This will actually make American manufacturers (those whose inputs are steel and aluminum like Boeing, Ford, etc.) less competitive with their foreign counterparts whose input prices are not subject to the tariffs. It will drive these American manufacturers further offshore or out of business.  As Frank Shostak notes, while this plan may benefit steel companies in the US who will make a higher profit, it will hurt the far greater number of companies who use steel as an input to their manufacturing process.  He writes: 
[T]he employment data contradicts the logic of Trump’s tariff policy. According to CNBC, while there are about 200,000 workers in the steel, aluminum and iron industries, there are 6.5 million people employed by businesses that use steel. This raises the risk of undermining rather than benefiting the US labor market.
As Schiff explains, why not just make the products that require steel, like a washing machine, outside the US and then export the washing machine, which is not subject to the tariff, back to the US? These tariffs will hurt American consumers by increasing prices, erode our industrial base, and ultimately increase our trade deficit with the rest of the world.
If some so-called "free trade agreement" is not really a free trade agreement and gives advantages or subsidies to some in favor of another then fine, rip it up, and start over with the goal being real free trade. If a trade partner is a military threat or oppresses its people in the manufacturing of goods, then it's appropriate for the American government to prohibit or embargo goods from that country.  But that is hardly the case here.  Note that China is tenth on the list of companies in terms of steel exports to the US. Canada is the number one exporter of steel followed by Brazil and South Korea.   
But the real solution to making American companies more competitive is LESS taxes, less regulations, OR simply more freedom. What we need is less government spending, less taxes, and more savings and capital investment in plant and equipment which makes labor more productive and increases everyone's standard of living.  If on the free market, our companies do not have a comparative advantage, then so be it. It's advantageous for American producers to focus on where they have a comparative advantage, not manufacture goods that others can already produce more efficiently. That is stupid and destructive to the very people it's intended to help.
In general, tariffs are a less awful way to fund government than income taxes.  If we were to cut government spending and replace the income tax with an across the board tariff on imported goods, that would be a reasonable approach.  Picking winners and losers by taxing specific goods while keeping the income tax and even increasing government spending is the worst thing you could do.  

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