In Unpacked, Brookings experts provide analysis of Trump administration policies and news. Subscribe to the Brookings Creative Lab YouTube channel to stay up to date on the latest from Unpacked.
THE ISSUE: In an attempt to rectify the United States’ trade deficit, President Trump announced last week that he plans to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. Though the president hopes these new tariffs will stimulate growth in the steel and aluminum industries, they could potentially incite a trade war between the United States and its strongest allies.
A trade war is essentially an escalating set of tit-for-tat trade restrictions. Ultimately, no one wins a trade war.
THE THINGS YOU NEED TO KNOW:
- President Trump’s decision on tariffs seems to have been driven by a desire to do something about America’s high level of trade deficits.
- What Trump is proposing to do is to impose a tariff of about 25 percent on steel imports and 10 percent on aluminum imports to try to preserve jobs in the steel and aluminum industries and help those industries—which have been declining for a while—grow.
- President Trump hopes these tariffs will help the U.S. economy grow faster both in terms of output and employment.
- Though in theory a trade deficit could cause economic concerns, the correct way to view a trade deficit is not as simply a country losing out, but rather as a combination of macroeconomic factors and policies that drive consumption and investment decisions.
- If an economy consumes more than it produces, than it is going to have to import goods from the rest of the world and it runs a trade deficit.
- A trade deficit is not necessarily a bad thing because it means that consumers are consuming more and there is more investment happening in the economy.
- If a trade deficit is driven by investment, then that is potentially a very good thing because it means more economic growth in the future.
- It is true that U.S. steel and aluminum producers have not been doing very well in international markets. These two industries have been shrinking and their share of global output has fallen quite dramatically over the last 17 years.
- China’s share of world steel production is now about 50 percent and the U.S. accounts for only about 5 percent of global steel production.
- However, when it comes to employment, other factors have been driving down employment in these industries, such as automation.
- Though the tariffs will certainly help the steel and aluminum industries increase profits and increase output to some extent, they will probably not bring back lost jobs in these industries.
- There could be a slight negative effect from these tariffs on the overall economy, especially if America’s trade partners take actions to retaliate against unilateral trade sanctions.
- A trade war is essentially an escalating set of tit-for-tat trade restrictions imposed on each other by some trading countries.
- Ultimately, no one wins a trade war. It creates concerns for the economy that reduces consumer and business confidence, which means there is less consumption and less investment in the economy.
- Businesses all across the world are connected through supply-chains. The disruption of supply chains due to trade barriers could end up hurting all businesses, including American businesses.
- A trade war might sound very good from a martial perspective or from a political perspective but, in terms of economic benefits, there are not many.
- The actions threatened and taken by the Trump administration have significantly undermined America’s role as a proponent of free trade. It has created the notion that America is not a trustworthy or reliable partner when it comes to trade or other economic issues.
- These tariffs certainly reduce America’s influence in terms of international engagement, and creates a void, that other countries like China, are too willing and happy to step into.
- The U.S. thinks it has a lot of leverage when it comes to international trade negotiations because it has the largest economy in the world and the largest single country export market.
- Secretary Mnuchin seems to believe that, even though the U.S. walked away from the Trans-Pacific Partnership (TPP) agreement, the other countries would be happy to take the U.S. back if it expresses interest in a revised TPP.
- The 11 other countries in the TPP have already gone ahead with a revised version of the agreement and, at this stage, it is very unlikely they will reopen the negotiations to bring the U.S. back in.
- The reality is that when the U.S. steps back, the rest of the world moves on, and they do not want to include the U.S. anymore.