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A Terrifying Proposition: Why Looking to Tariffs and Trade Wars to Fix Domestic Industry is a Bad Idea

When the Director of President Trump’s National Economic Council Gary Cohn resigned in March, the stock market dropped almost 300 points the morning after the announcement. ((Paul J. Lim, Why the Stock Market Freaked Out After Trump Advisor Gary Cohn Resigned, Money (Mar. 7, 2018), http://time.com/money/5188794/gary-cohn-resigns-economic-advisor-stocks/.)) While your first reaction may be to write it off as coincidental, it is anything but, as the market displayed a similar reaction when rumors of his resignation were swirling last August. ((Kate Kelly & Maggie Haberman, Gary Cohn Says he will resign as Trump’s Top Economic Advisor, NY Times (Mar. 6, 2018), https://www.nytimes.com/2018/03/06/us/politics/gary-cohn-resigns.html.)) Why then does the resignation of one man cause the market to react so poorly? The subsequent announcement of two major tariffs in what appears to be the beginnings of a trade war has a lot to do with it.

Cohn was well known to be one of the leading opponents to Trump’s nationalist “America First” Policy. ((Id.)) With him gone, there is no one left in the white house to fight the President on his protectionist goals. As part of his campaign slogan to “Make America Great Again,” Trump fixated on the steel industry as one of the industries where he was going to put American workers first, purportedly asking White House aides, “Where are my steel tariffs?” ((Id.)) Cohn was of the biggest reasons why tariffs had not been implemented during Trump’s first year, but his resignation signaled to the market that he had lost on the issue. As a result, Wall Street began to sour on the future of the market.

The reason to be so sour? The last time the United States engaged in a trade war on this proposed scale, with both blanket tariffs on steel and aluminum and tariffs on Chinese imports, was in 1930, when Congress passed the Smoot-Hawley Act. ((Chris Cillizza, The last American ‘trade war didn’t work out so great’, CNN (Mar. 2, 2018), https://www.cnn.com/2018/03/02/politics/donald-trump-steel-tariffs-q-and-a/index.html.)) The Act, which was aimed at protecting American jobs, resulted in a drop of imports by 40% within two years and caused the United States to sink deeper into the Great Depression. ((Id.)) While proponents of the tariffs during Trump’s campaign trail have rejected comparisons to Smoot-Hawley, their distinctions relied on the fact that subsequent tariffs were directed at single industries or at one country, as opposed to raising tariffs on everyone. ((Patrick Gillespie, Remember Smoot-Hawley: America’s last trade war worsened the great depression, CNNMoney (July 7, 2016), http://money.cnn.com/2016/07/07/news/economy/trump-trade-smoot-hawley/index.html?iid=EL.))  However, there have not been tariffs of this scale since Smoot-Hawley for one, and to make matters even worse, recent tariffs have usually come with exemptions for allies and major trading partners. As of now, the President’s proposals have made no mention for allied nations aside from temporary reprieves, which could lead to large scale retaliations.

Tariffs of this type are ultimately a losing proposition for both the domestic economy and for international relations. On a macroeconomic level, the consequences of the Smoot-Hawley tariff exemplify the worst thing that can happen when a government implements protectionist policies. And on a smaller scale, the negatives almost always outweigh the positives. For a recent example, look no further than President Obama’s tariff on Chinese tires in 2009 which was meant to protect US tire companies. ((Cillizza, supra note 5.)) While it definitely achieved its desired outcome of protecting 1,200 tire jobs, an estimated 3,700 retail jobs were lost as a result, according to the Peterson Institute for International Economics. ((Id.))  It’s not like the manufacturers bit the bullet on the increased costs either, as the effects of the tariff also passed onto the consumer; some Chinese-made tires cost as much as 26% more and prices on American-made tires rose by 3.2%. ((Patrick Gillespie, Obama got tough on China. It cost US jobs and raised prices, CNNMoney (Jan. 3, 2017), http://money.cnn.com/2017/01/03/news/economy/obama-china-tire-tariff/index.html.))

When it comes to the current steel and aluminum tariffs, the beer industry has been very vocal about the negative effects the tariffs will have on local employment. MillerCoors, the second largest U.S. brewing company, released a statement saying that the increased cost for aluminum, which is needed for its cans, will likely lead to layoffs across the industry. ((Sarah Gray, MillerCoors says Trump Aluminum Tariff will Kill Jobs ‘Across the Beer Industry, Money (Mar. 1, 2018),  http://time.com/money/5181928/millercoors-twitter-trump-tariff-aluminum-steel/.))

The impact of the tariffs on the United States internationally is also a cause for concern. While a trade war with China will obviously hurt US-Chinese relations, the steel tariff will hurt relations with other foreign nations as well. In 2017, the US was the world’s largest importer of steel and the top 10 source countries for US steel imports represented 77% of the total steel import volume in 2017. ((Global Steel Trade Monitor, International Trade Administration, Steel Imports Report: United States (2018), available at https://www.trade.gov/steel/countries/pdfs/imports-us.pdf.)) Risking retaliation from countries that are major trading partners, while at the same time provoking a trade war with China, could create the same economic conditions that deepened the Great Depression when the United States found itself facing retaliatory imports from Italy, Spain, Switzerland, and Canada as a result of Smoot-Hawley. ((Gillespie, Remember Smoot-Hawley, supra note 7)). In today’s global economy, the world is far too interconnected for the United States to try to go at it alone. Targeting a specific product from one nation after violation of a trade agreement, as Reagan did with Japanese motorcycles, is one thing. ((Gillespie, Remember Smoot-Hawley, supra note 7.)) Blanket tariffs are another. While Reagan was still engaging in a form of protectionism, at least the retaliatory backlash of such a move remained relatively limited. Here, President Trump has not been precise which could create the same set of conditions that made the Smoot-Hawley Act so disastrous.

It will be interesting to watch how the World Trade Organization responds. When Smoot-Hawley was enacted, the WTO was not around to comment on anything. In the past, it has been willing to intervene against such protectionist tariffs from US Presidents. In 2002, President George W. Bush tried enacting a similar blanket tariff on steel but the WTO ruled that it violated trade agreements, opening the door for sanctions. ((Justin Worland, Trump Wants to Impose Steel Tariffs. It Didn’t Work for Bush, Time (Mar. 1, 2018), http://time.com/5180901/donald-trump-steel-aluminum-tariff/.)) While President Bush backed off, it remains to be seen how the current administration will respond, given its disdain for international organizations.

When Trump said he wanted to “Make America Great Again,” he likely did not mean taking us back to the Great Depression. But if he manages to enact the full tariff plan, his policies will lead us in the direction of the Great Depression.