Protectionists are declaring victory in the aftermath of South Korea’s negotiation of an agreement to avoid the Trump administration’s steel tariffs. The White House declared that the renegotiation of the trade agreement between the two countries was a victory for American workers, with White House trade advisor Peter Navarro calling the deal a “home run.” The protectionists’ entire worldview is wrong: the deal is a trade restriction, plain and simple, and will end up harming American workers and consumers in the long run.
Under the terms of the deal, South Korean steel imports would not be subjected to the 25 percent tariff that other countries would be. Instead, a quota would be imposed that would restrict South Korean steel exports to the United States to 70 percent of the amount exported to the U.S. over the past few years. A 25 percent tariff on pickup trucks imported to the United States from South Korea that was set to expire in 2021 would also be extended by 20 years under the agreement.
Many Americans have bought into the false narrative that trade is an adversarial relationship: exports are good, and imports are bad. “Winning” at trade therefore consists of cutting back on imports as much as possible while avoiding foreign countries’ restrictions on exports. In the minds of Trump advisors like Navarro, trade deficits are the ultimate metric of a nation’s success in this regard — thus tweets like Trump’s “When you’re already $500 Billion DOWN, you can’t lose!”
The framing of exports as good and imports as bad is attractive to politicians because it’s simple, and politicians prefer to sell a simple message than a complicated one. But it’s deeply flawed from an economic standpoint.
The reality is that imports and exports are deeply interconnected. Even if one holds up maximizing exports as the ultimate goal of trade policy, greater imports would be a necessary element of this. Increased imports mean more options for consumers, and many consumers are exporting businesses that rely on imports to manufacture products at a lower price. With higher levels of imports, exporting businesses in the United States are able to manufacture and sell products of higher quality and at lower prices. This allows them to be more competitive on the global stage.
Consider the case of car manufacturers. The impact of steel and aluminum tariffs will be to increase the production cost of American automobiles. American automobile exporters will therefore struggle to compete globally even in the absence of retaliatory tariffs, as they are being forced to contend with an artificial restriction in the supply of aluminum and steel in the market.
A quota on South Korean steel imports will have a similar effect to a steel tariff on production of American products that require steel as an input — supply will be restricted, increasing prices. This is bad for American exporters. Put simply, the protectionist fantasy of a country that allows no imports but has exporting businesses that are competitive on the global market is infeasible — so much so, in fact, that it has never happened in the modern-day world.
This is the reason why the data show that decreased imports rarely correlate with increased exports. Trade deficits in general are a highly misleading statistic — rather than representing whether a country is “winning” trade, they represent savings and consumption patterns. Dollars that go overseas eventually have to come back, and generally they do so in the form of investment in American businesses. The American trade deficit reflects little more than the fact that the United States is an attractive investment opportunity. As Mark J. Perry of the American Enterprise Institute points out, “Another name for a ‘trade deficit’ is a ‘capital account surplus.’”
This is not to say that the South Korean deal was all bad. South Korea also agreed to double the quota on American car imports that do not meet Korean safety standards, cut down on bureaucratic barriers to American exports, and allow American pharmaceuticals increased access to the South Korean market. These are positive developments in the effort to free up international trade.
However, to suggest that the South Korean deal was a “home run” for anyone but large, successful steel businesses is bad economics. A healthy economy needs both exports and imports. Trump’s deal with South Korea will decrease both.