In late March, President Trump imposed steel and aluminum tariffs on China, Russia, Japan, and Turkey. Since then, the United States has even extended tariffs to some of our closest allies such as the European Union, Canada, and Mexico. The tariffs are intended to help American economics. But critics say the tariff policy undermines the basic principles of free trade economics—and may cause economic and diplomatic harm in the short and long terms.
Free Trade between Nations
Free trade allows people around the world to share profitably in the bounty of God’s creation: Nations blessed with fruitful farms might trade with others who have abundant mineral wealth, for example. Countries operating on free trade economics try for a win-win arrangement so that each benefits. It sounds great as long as it works. But sometimes free trade develops into a disadvantage for one country. Say, for instance, one nation is buying lots of grains and produce—but it is selling little of its iron ore. That can lead to a trade deficit—a major economic imbalance.
Addressing a Trade Deficit
One way to try to balance a trade deficit is by imposing tariffs on imports from another country. The tariff is a tax applied to imported goods by the receiving nation’s government. It is paid by the provider of the goods to the receiver’s national treasury.
Countries are especially emboldened to fix tariffs to imports when they can produce those goods themselves—or get them cheaper from other countries. The tariff strategically inflates the price of the foreign goods. Consumers may purchase fewer of the pricier goods as a result—or shop around for domestic options.
An example goes like this: Say you want to buy a Japanese soccer ball. It normally sells for $20. But Japan’s products are competing too much with American-made products. So the U.S. government adds a 25% tariff to Japanese recreational imports. Now your ball will cost $25. Big difference, right? The extra $5 goes to the U.S. Treasury. If you buy American, you might spend less overall and the sale goes to another American company.
Enter the “Trade War”
Using tariffs this way can sometimes lead to a “trade war.” It isn’t a military scuffle, but it does involve response and sometimes escalation. A trade war occurs when a nation that has a tariff imposed upon it retaliates. It adds tariffs to imports it receives from the country that felt disadvantaged. This scenario can turn into a global game of “You tax me and I’ll tax you right back!” So why risk a trade war by starting off with tariffs at all?
President Trump’s plan is intended to help the American economy in the long run. He says he wants to discourage other countries from dumping products on American shores at unsustainably low prices. He would encourage them to buy more American products to better balance the trade relationship too. He proposes tariffs of as much as 25 percent on numerous imports. Americans may be more inclined to buy from American manufacturers as imported prices rise. President Trump anticipates that higher tariffs on foreign products will give American manufacturers a competitive edge and in time, boost the economy.
China has already struck back, threatening tariffs on 134 American products, including pork and recycled aluminum products. Mexico and Canada have threatened or already imposed tariffs on U.S. dairy products. The European Union plans to penalize Wisconsin-based Harley-Davidson motorcycles with a tariff. Farmers like Jeff Columbini worry that foreign tariffs will make U.S.-grown crops too expensive to sell overseas. “We’re not going to be able to sell all of our crop. And so, some is probably going to go unharvested or just dumped.”
Effect on Consumers
There’s another possible downside too. Cheap imports are good for American families’ budgets, right? Yes. But when foreign prices are too low, they can harm the success of domestic manufacturers who can’t afford to sell at foreign prices. That can mean fewer jobs—or lower-paying ones—for Americans. American steel producers have suffered for years because they can’t compete with Canada’s ultra-low steel prices. A tariff on imported steel might be good for the American steel manufacturer. But the American consumer will have to pay more for products made with steel then—at least in the short term.
Many American manufacturers buy low-priced foreign steel and aluminum. With it, they generate products like cars, canned drinks, and machinery. Those manufacturers fear tariffs will raise prices on steel dramatically—and, consequently, on the price of their products. Some of these U.S. companies would rather buy foreign than pay steep domestic prices.
Tariffs are one way nations negotiate with one another so trade benefits their citizens—as workers, providers, and consumers. But the complexity means we’ll likely hear more about tariffs and trade wars in the future.