Last week, President Trump announced his intention to slap tariffs on steel and aluminum imports (25% and 10% respectively). Though the ink is not dry – this is only a blueprint – the markets did not react well and continued a decline that started earlier in the week.
Why are tariffs a bad idea?
From an economic perspective, tariffs work well in the short run but are not beneficial in the long run. A tariff on commodities will lead to a rise in inflation because the cost of goods that include steel or aluminum will rise. Few times in history have tariffs not been followed by inflationary pressures, so the Fed will certainly watch this carefully.
After tariffs are implemented, they are often dialed back quickly. President George W. Bush stoked higher steel prices by placing tariffs on imports. It worked for US-based steel companies – they all soared. But the stock market fell around 40% the following year, so the administration quietly reeled it in.
The ramifications from a protectionist policy like this is unknown. Other than steel producers, I have yet to see one word of support for this policy. The US – along with many countries around the world – have followed free trade agreements for years. These agreements have opened up trade borders and allowed economies to thrive. Take a look at the amazing growth in China over the past two decades. They are not free traders completely but opening their borders has transformed the economy.
To the rest of the world, the US will be viewed as protectionist, and that will have trade ramifications down the road. It is not just about steel and aluminum, but it is about policy, which every country will respond to. It won’t be positive.
