President Trump’s Commerce Department is considering whether to impose restrictions on foreign imports of steel. Such a weighty decision will affect the economic conditions of millions of Americans, so one would hope that the administration is relying on input from impartial experts with the best interests of all Americans in mind, right? Not necessarily — a recent report indicates that major executives from the steel industry are petitioning Trump directly to intercede on their behalf, at the expense of downstream industries that rely on steel as an input. Recent history tells us that this is a bad idea.
The decision before the Commerce Department is whether foreign steel imports constitute a threat to the country’s ability to supply defense forces with steel in time of war. This is based upon an obscure and rarely used provision that allows the Commerce Department to impose import restrictions on foreign imports that threaten national security. I have written previously about how this is a specious concern, but the steel executives’ letter is possibly even better proof that this is naked protectionism: the letter praises Trump’s “bold leadership” and “America First vision” and focuses on the steel industry’s economic concerns, with only passing mention of national security. The executives are not really concerned about the military’s readiness, they are stroking Trump’s ego in hopes that he will reward one of his favorite industries.
Even if one sets aside the dangerous precedent of using a national security provision to justify a protectionist economic policy, you can’t have favorite industries without disfavoring other industries. Downstream businesses, or businesses that use steel as a raw material, will be negatively affected by steel tariffs, and they are far more important to the U.S. economy than the steel industry is. One report found that, in 2015, domestic steel producers employed 147,000 workers. Contrast this to domestic manufacturers that use steel as an input (6.5 million workers) and the construction industry (6.3 million). In other words, domestic steel accounts for barely 1 percent of the American employees whose jobs would be affected by higher steel prices, yet the administration is considering protecting the tiny domestic steel industry.
Trade groups representing these steel-consuming manufacturers have warned Trump to look at recent history as evidence for why import restrictions on steel would be a bad idea. In 2002, President Bush imposed a 30 percent tariff on foreign steel imports in response to domestic steel’s request for protection (notably, this was not justified on the basis of national security concerns as Commerce rejected the idea that a tariff would be necessary for that purpose). The effect on downstream industries was massive — steel prices soared by 30-50 percent, production was unable to meet demand, and 200,000 Americans lost their jobs during 2002. A little over a year later, the tariff was repealed.
The repeal of the tariff was the result of more than just the immediate effects of the steel tariffs. At the time, the threat of retaliatory tariffs was a significant concern, and there is no reason why this should be any less of an issue today. The EU is already preparing retaliatory tariffs on a whole bevy of American products in case Trump decides to impose import restrictions on steel. Agricultural producers, which often rely on exports, have also expressed concern that steel import restrictions would ignite a trade war that they do not want to fight.
Trump should take these lessons to heart when he considers whether or not to impose import restrictions on foreign steel producers. Rewarding a small group of political allies is simply not worth the cost for the rest of the economy.