International Economics – Heated words has recently been exchanged between President Donald Trump and EU Commission chief Jean-Claude Juncker, where a trade war between the European Union and the United States has seemingly been proposed.
The conflict is essentially this: (1) Trump announces plans for applying tariffs on European steel and aluminium to support American businesses; (2) Juncker says EU will respond by putting tariffs on American industries; (3) Trump exclaims that if they respond in that manner, a tax will also be put on imports of cars from Europe.
Trump has taken note of the US’ massive trade deficit of $800 billions and asserted in a tweet on Saturday that he seeks to renegotiate current trade deals and policies, which are “very stupid,” according to him.
Republicans in Congress have been split on the issue, and as free trade is a crucial principle for many of them, they have attempted to convince him to go back on his decision, as it would damage the economy and nullify the recent growth which has been made there. It also splits his voter base, with free market and free trade advocates on the one hand, and business leaders on the other. “Made in America,” was his slogan during a week in July last year where he visited and celebrated American industries, but in his tax plan he strongly supported a reduction in taxes. These two standpoints appears to clash in Trump’s recent decision.
The real problem with Trump’s Protectionist decision here is that it serves against its cause. It damages the American economy and industry. This is illustrated clearly in the drop in Dow Jones Industrial Average (Dow) following his statement, showing what damage an introduction to tariffs on foreign steel and aluminium will have on the economy. The Dow is measured from how well 30 large state-controlled businesses do during a regular trading session in the stock market. [Image 1]
Trade groups and businesses have strongly opposed Trump’s decision as many American businesses are dependent on foreign steel and aluminium for their products. Beer Brewing company Miller Coors are one of these companies, and has explained their opposition on Twitter.
We are disappointed with President Trump’s announcement of a 10% tariff on aluminum. While we won’t know the details for a week, the Department of Defense recently reported that aluminum does not cause any national security issues. Like most brewers, we are selling an increasing amount of our beers in aluminum cans, and this action will cause aluminum prices to rise. It is likely to lead to job losses across the beer industry. We buy as much domestic can sheet aluminum as is available, however, there simply isn’t enough supply to satisfy the demands of American beverage makers like us. American workers and American consumers will suffer as a result of this misguided tariff.
Trump, however, has treated the backlash with indifference, opining “We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!” In another tweet he said that the decision will actually help America, and that “trade wars are good, and easy to win.” As an example he proposed that “when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
This ought to make any Libertarian outraged to hear from a president. With all his previous apparent advocacy for Libertarian principles, it now appears he has zero knowledge of political economy, despite having owned several companies himself. We see the fallacy in clear light by reading the outcomes already mentioned of the stock market and businesses. Exchange is of equal benefit to the two parties if both have negotiated and agreed with a price, it is so also internationally.
Claude Frédéric Bastiat wrote strongly against Protectionism back in the middle of the 19th century, where he exposed where this attitude arises, and disputed it thusly. Though about 170 years has passed since his writings, this seems to be the time to take a break for a moment and look back to wisdom from the past.
Support for Protectionism is deduced from the idea that economic value arises from labour. Bastiat denounces this fallacy by pointing to the fact that the conditions of labour is differently in different places, most notably in respect to climate with some fruits being easier to cultivate some places than others, but also with the quality of the soil. This also applies equally to metals like steel and aluminium being dug out from the ground. Some places they are more accessible and abundant than other places, and thus with some countries thereby gaining a larger supply, they can sell them for cheaper, following the laws of supply and demand. Protectionism, in its essence, protects the producer at the expense of the consumer. What is seen is the American steel- and aluminium providers who sell the metals for equally or less than the foreign ones. What is not seen, or seen less clearly, is the amount the consumer could save by the tariff abstaining, and the taxpayer’s money serving a cause which is doomed to rupture.
How this works in practice, we may let Americans companies describe for themselves. Vox made a list of statements different American industries had of Trump’s decision, which is too long to copy word-for-word, but it essentially saw US car dealers, auto manufacturers, boat manufacturers, the beer industry, retailers, machinery manufacturers and US business groups all oppose the decision, saying it will damage their companies and industries. The steel- and aluminium producers, however, are – as we would expect – in favor.
Remember what Bastiat said of that which is seen and that which is not seen in the political economy? Should we ignore all the other ones for the sake of the steel- and aluminium producers getting advantage over the ones doing a more efficient and better job, and the American manufacturers and businesses dependent on import of these materials? Bastiat makes clear that it isn’t the labour which produces value, but the exchange, and thus the result matters. We can’t keep throwing obstacles in the way of other businesses for the sake of “our’s” to be saved. It is not sustainable for the consumer and it is not sustainable for the economy, but only for the few producers which happen to gain advantage. Trade wars are good and easy to win, according to Trump, but, as with any war, while they may be easy to win and of advantage to a few people, it doesn’t mean that everyone else won’t end up in misery as a result.