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The Global Trade War Comes Full Circle


Added 07-11-19 12:21:01am EST - “Economic reality is always more complex than politicians pretend it is.” - Reason.com

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Posted By TheNewsCommenter: From Reason.com: “The Global Trade War Comes Full Circle”. Below is an excerpt from the article.

It has always puzzled me that anyone would believe that protecting the U.S. market with tariffs is a good idea. Yes, U.S. consumers might increase their demand for domestic goods because duties on imported foreign goods make them relatively more expensive. But these duties also create massive market distortions and malinvestments, which often backfire against the very industries that are ostensibly being protected.

Case in point: the steel industry and Trump's steel tariffs. Back in March 2018, President Donald Trump announced that he would be imposing 25 percent tariffs on foreign steel. The idea was to make the price of foreign steel so expensive that domestic consumers of imported steel would start to consume more domestic steel. For those who defended the steel tariffs, it didn't seem to matter that at the time 70 percent of U.S. steel consumption was already domestically sourced. The president expected more, and the steel executives who disliked foreign competition cheered him along.

American steel consumers were suddenly forced to buy more expensive steel (whether foreign or domestic) because the president thought it was a better way for them to spend our money. Never mind that the U.S. steel industry often didn't even produce the type and quality of steel on which the tariffs were imposed. And never mind that steel-consuming American manufacturers and workers begged their government to not punish them for the way they run their business. Tariffs went up.

As a result, the price of steel went up for a while, the U.S. steel industry fired up its mills, and U.S. steel output went up dramatically. For a while, it seemed like it was all working according to Trump's plan—for the domestic producers of steel, that is, not for consumers. As U.S. companies were still trying to figure out their options, some had no choice but to shift their demand and increase purchases of domestic steel. The industry responded by adding more capacity than they would have had without the protection.

Yet because they were responding to an artificial and temporary increase in demand triggered by the tariffs, as opposed to real market signals, they failed to recognize the global economic slowdown and the subsequent reduction in overall demand. As a result, prices of steel went down quite dramatically. That's what we economists call malinvestment, and as a result, the older, less productive blast-furnace steel mills are now paying a dire price as they're unable to stay profitable even with the foreign competition out of the way. And because misery loves company, the furnaces suppliers are in trouble, too.

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