The jury won’t be out long to find that the new steel and aluminum tariffs aren’t smart at all.
President Donald Trump has fulfilled yet another campaign promise. He has opted to impose tariffs on steel and aluminum goods coming from overseas. Trump has cautioned the American people about the dangers of untrammeled free trade for decades.
Unlike many of my free trader friends, I recognize the damage that free — but unfair — trade has done to the United States. In his seminal work, Death by China, current White House trade policy adviser, Peter Navarro, outlined how China has used the utopian assumptions of free trade and globalization to enrich and empower itself at America’s expense. Navarro (and others) likened China’s policies over the last 30 years to amounting to a sustained economic war that targeted the American middle-class, in turn, causing the rapid decline of the United States. Navarro was a key figure in the president’s recent decision to enact a 25 percent tariff on all steel coming into the United States and a 10 percent tariff on all aluminum coming into the country.
If you are a worker in steel or aluminum-producing fields in the United States, hope has been returned to your lives. If you are corporate leader for an American company in either of these industries, you are praising Trump for his courage. There is little doubt, also, that the United States was shedding critical industries related to national security for far too long. And, as a former political hack, this is a refreshing turn, because Trump is taking away a critical Democratic talking point going into the 2018 elections. Between the historic (though incomplete, in my view) tax cut enacted last year and the move to put the profits of Wall Street on hold to favor middle-class, blue-collar workers in the steel and aluminum industries, the Democrats will have little maneuvering room in 2018.
But, what happens if there is more damage done to the United States in the long run?
The president’s stated target of the tariffs was the growing threat in China. Unfortunately, though, China is not even in the top five of countries that will be most negatively impacted by these tariffs. Fact is, these tariffs would have been great if it were still 1994. Today, it might be too-little-too-late. When these industries return to the United States — if they do — in any meaningful way, automation will continue gobbling up employment opportunities.
More dangerously, rather than harming China (or even prompting them to enter into fairer trade agreements with the United States, which I suspect was the initial theory undergirding the Trump Administration’s decision) the tariffs might end up empowering China geopolitically. Germany, a country negatively hit by these tariffs, is already doubling-down on its calls for greater free trade with China — thereby further isolating the United States globally. Canada, meanwhile, is vowing to reciprocate. The European Union is also threatening retaliation — possibly by banning whiskey coming in from America!
President Trump was right to point out the damage that unfair trade caused America. Yet, the tariffs he announced earlier this week were far too steep. And, as per the usual with his governing style, Trump’s rollout was a disaster. He not only caught our rivals in Beijing off-guard (a good thing), but he also completely surprised our friends (not so good — remember Iraq in 2003?).
Trump could have still done his protectionist measures of steel and aluminum, but at lower rates — and in close consultation with our allies. After all, countries like Germany and Canada prefer to do business with the United States, so long as there is mutual benefit for them. We could have made a deal with them — and Trump should have been the perfect man to do it — to save face, show unity, and prevent the kind of trade war death spiral that we might be facing soon.
The United States does need protectionism. Specifically, it needs smart protectionism. We certainly can — and should — try to bring back certain manufacturing capabilities that are essential for national security (and that have been allowed to wither on the vine), but we should look more closely at protecting our technology sector.
Over the last decade, the United States has ignored the fact that critical, high-tech firms were uprooting their operations from America and moving into China. It is so bad that, according to KPMG’s quadrennial tech innovation survey, Shanghai, rather than San Francisco, is set to be the world’s leading tech innovation hub by 2020. Google is placing their artificial intelligence hub in Beijing rather than New York. And, Apple is investing over $500 million in research and development in China’s tech innovation hubs of Shanghai and Shenzhen. There are now more patent applications emanating from China than the United States.
The American tech firms are opening their vaults to China, just as previous firms have, anticipating exceptional returns. And, to be sure, American tech firms will see their returns expand greatly as China continues its development into a modern, post-industrial economy. But, each innovation that these firms produce in China will not merely be a financial boon for them (and China). They will also be a strategic bonanza for the Chinese government. All of this has extremely negative implications for the United States today — in the same way that losing steel and other manufacturing jobs had for the United States in the 1990s and early 2000s.
In response to the wave of negativity over the tariff announcement, the United States Commerce Secretary, Wilbur Ross, told Fox Business Network’s Stuart Varney, that the impact of these tariffs will be negligible on American consumers. More importantly, the administration believes these measures will protect American industry. Patrick J. Buchanan made a similar argument in his 1998 book, The Great Betrayal, when he stated that American industries in the early years of the United States grew from infancy, thanks to the protectionist wall erected around the country. In fact, China emulated this during its recent rise to power.
Unfortunately, though, when both the United States and China rose, neither were world powers with immense, global trading portfolios. Today, the United States is the preeminent global trading power. We still do depend on that trade for our economy.
Enacting tariffs on steel and aluminum will not be the end of the world. And, they will likely breathe much-needed life into those dying industries. But, it will cause allies that we need in the coming competition with China to distance themselves and run into the waiting arms of China — thereby neutering America’s capabilities to wage (and win) the coming “Cool War” with China. Meanwhile, the industries that the United States will need going forward — the high-tech sector, in particular — are being allowed to flee to China and empower the Chinese military and government at America’s expense.
David Goldman is right, therefore, when he warns that going too far down this protectionist rabbit hole as Trump is intent on doing will lead the United States to mirror the economic appearance of Brazil. The goal must be to improve our geopolitical position in relation to China rather than further isolate ourselves from the world. That isn’t putting America first at all. That’s strangling it.