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Receive the Reality: Tariffs and Trade Wars

The talking heads on your television have been in a tizzy over tariffs and trade wars. Here’s why:

President Trump recently signed two presidential proclamations placing a 25% tariff on steel and a 10% tariff on aluminum. (Read the proclamations for yourself: aluminum/steel) A tariff is a tax or duty (like a tax but on goods) to be paid on a particular class of imports. Trump argues he did this in the name of “national security”, and states such in the proclamation. It reads, “The Secretary [the Secretary of Commerce Wilbur Ross] found and advised me of his opinion that aluminum is being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”

When President Trump announced this, people erupted with fears and cheers. Some feared a trade war would commence and others cheered his actions as long overdue.

The Reality:

Some believe these tariffs are the beginning of a trade war and will damage economic growth. The tariffs do go against the “free market” and “globalist” mentalities that most economists agree are beneficial to economic growth. They’re so disliked by economic minds that Gary Cohn resigned from his post as an economic advisor to the President due to them. However, as of right now they have not resulted in a trade war, and there’s a chance they won’t.

While President Trump has spoken in protectionist terms for a few decades, he’s also a businessman and knows how to negotiate. Many believe this could be just an anchor position in a negotiation which he’ll then scale back to his ultimate goal.  We’ve seen some evidence this may be the case, with the exemptions of Canada and Mexico that resulted in many countries rushing in to be exempted themselves.

On the flip side, if President Trump does maintain the tariffs, there is a chance a trade war will develop. The EU already announced a plan to retaliate by implementing protectionist policies against some American goods. And in response to this, President Trump took us a step closer to a trade war when he threatened protectionist measures against European automobiles.

So, in reality, we’re not at a trade war…just yet. Those who are calling this a trade war are jumping the gun. However, there’s a good chance it can lead us into one if the Trump Administration continues down the protectionist path or plays their hand too aggressively.

As for job creation, it may create jobs, but overall it will most likely have a negligible or negative effect.

For all the jobs gained via protectionist measures, such as the reopening of the steel plant in  Illinois, the same amount of jobs, or more, may be lost from the extra costs taken on by companies who use steel and aluminum as raw goods for a finished product. As this article from Fortune states, “while the number of American workers in the metals industry could increase by an estimated 33,464 jobs, the decrease in other industries would be more significant: an estimated 179,334 jobs. This means that the net loss could total 146,000 jobs.”

So, what could this all mean?

If President Trump simply uses the tariffs as an anchor and negotiates “better deals” for the US in trade partnerships, these tariffs are nothing more than a bargaining chip. If President Trump continues with protectionist policies, a trade war could erupt, resulting in a major headwind for the global economy. 


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