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Friday, March 23, 2018

Even Protectionists Agree That Tariffs Will Make Us Poorer

The debate is no longer whether these new tariffs will be harmful to the U.S. economy, but rather the magnitude of the damage. 

President Trump’s announcement of new tariffs on imported steel and aluminum drew swift warnings from free traders, including here at the Cato Institute, that such naked protectionism will lead to job losses and reduced prosperity. But don’t just take our word for it.

A new study released this week by the Coalition for a Prosperous America (CPA), a protectionist interest group, concludes that the tariffs will result in both net employment losses and reduced economic activity. While the CPA highlights the study’s finding that tariffs will lead to 18,859 new jobs in “iron and steel nonferrous metals,” it also concedes that these will be more than offset with losses in other sectors, including over 10,000 jobs in construction and nearly 7,500 in manufacturing, for a net loss of 411 jobs. Additionally, the study finds that the tariffs will leave Americans marginally poorer, predicting a decrease in U.S. GDP of $1.4 billion. 

Protectionism will lead to job losses and reduced prosperity.

In other words, the debate is no longer whether these tariffs will be harmful to the U.S. economy—the protectionists have effectively run a white flag up the pole on that question—but rather the magnitude of the damage. 

Also worth noting is that the CPA study presents a best-case scenario, using assumptions that are, if not questionable, perhaps overly optimistic. For example, the model’s apparent assumption of full employment—by no means obvious given that recent sizeable monthly employment gains have not led to a reduction in the unemployment rate—appears in tension with the study’s claim that steel and aluminum will see relatively restrained cost increases of 6.29 percent and 2.5 percent owing to “available U.S. capacity and competition.”

Presumably, any increase in production to partially offset the decline in imports will require additional workers, which may be no easy task in a full employment economy. Furthermore, the study makes no mention of the impact of retaliation that is sure to follow from U.S. trading partners in response to Trump’s tariffs. The study’s finding that the tariffs will result in 464 new agriculture jobs, for example, is hard to square with retaliation threats from the European Union which include targeting American exports of corn, cranberries, rice, orange juice, and tobacco. 

Thus far, President Trump has not heeded the warnings of free traders.

In contrast, a recent analysis conducted by the Trade Partnership consulting group found that retaliation would contribute to net U.S. job losses of over 468,000. Even absent retaliation, a previous study by the Trade Partnership—one that the new CPA report was conducted in response to—still found a net loss of 146,000 jobs. 

The exact amount of the employment decline or loss in economic welfare, however, is almost a second order question on the steel and aluminum tariffs. Directionally, a consensus has been reached, with both free traders and protectionists in apparent agreement that they will cause harm to both jobs and the overall economy. Thus far, President Trump has not heeded the warnings of free traders and appears determined to proceed with his act of self-sabotage. Perhaps he will lend an ear to his fellow protectionists.  

Reprinted from Cato.

  • Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.