A Perfect Example of Why Token Tariffs Aren’t Enough

https://www.fidelity.com/news/article/top-news/202010090706RTRSNEWSCOMBINED_KBN26U161-OUSBS_1

Never mind the fact that Reuters, a champion of globalism, is eager to post negative stories about the use of tariffs by the U.S., especially when they relate to a battleground state like Michigan, and ignoring the distortion of the statistics due to the pandemic, the above-linked article makes a valid point.

The effects of Trump’s tariffs on steel offers a perfect example of why token tariffs, applied to one industry, can have the opposite effect of what was intended. Here’s the situation in a nutshell. The tariffs helped the steel industry at first. Steelmakers were able to thrive while getting higher prices for their steel. Before long, however, the increased costs for steel customers – most notably the auto industry – hurt their competitiveness with foreign auto makers. Sales slumped, reducing demand for domestic steel, which ultimately led to steel mill closures.

This is why you can’t take a piecemeal approach to trade policy. If tariffs are necessary to restore a balance of trade – which they obviously are for the U.S. – then they have to be applied across-the-board to every single manufactured product from every country that’s over-populated to the point where they are dependent on exports. Anything less is guaranteed to produce a trade deficit and a loss of manufacturing jobs.

Although I used a whole book, Five Short Blasts, to explain the concept, it’s fairly simple, really. People living in crowded conditions have low per capita consumption of products. After all, there’s not enough space to use and store them. They don’t use much, so there’s not much for people to do. Unemployment is high.

People living in less crowded conditions, on the other hand, enjoy high per capita consumption, requiring “all hands on deck” to produce what’s needed. People in that society enjoy full employment.

If these two societies try to trade freely with each other, a host-parasite relationship is established. The high population density / high unemployment state begins to feed on the market of the other, sapping it of its manufacturing jobs. It’s inescapable. The only thing the latter society can do is to halt the free-trade relationship.

As the Reuters article points out, the tariffs on steel helped the steel industry. Then why in the world wouldn’t you apply tariffs to all other industries?

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