At the beginning of March, President Trump announced to impose import tariffs on steel (25 percent) and on aluminum (10 percent). The legal basis is the national security threat law. Obviously the aim of these measures is to increase employment and income in the U.S. However, the economic outcome will be the opposite. Here are five reasons for this assessment.
# 1: Decline of purchasing power reduces domestic demand
If the U.S. imposes import duties on European products of 25 percent, the price for imported products rises by 25 percent. Higher prices reduce the purchasing power of U.S. citizens. Due to lower purchasing power, the demand for U.S. products diminishes. Therefore, production, employment and income in the U.S. decline.
Even if U.S. consumers switch to products from U.S. companies, they have to pay higher prices, because American companies have higher costs of production than companies abroad. If U.S. companies were able to sell their products at a lower price than foreign suppliers, there would be no need for import tariffs.
# 2: An increase in production costs reduces domestic demand
Import tariffs on steel and aluminum increase the costs of production of U.S. companies which need these raw materials. Moreover, imported intermediate inputs which contain steel and aluminum are more expensive. Hence U.S. companies have to sell their products at a higher price. The consequences for purchasing power, consumer demand, production and income are the same as described above.
# 3: Deterioration of competitiveness reduces U.S. exports
Higher costs of production due to import tariffs reduce international competitiveness of U.S. companies. Hence U.S. exports decline. Because of lower sales to foreign customers, U.S. companies have to decrease their level of production as well as their level of employment. This economic development is associated with an income reduction for the U.S. economy.
# 4: Lower growth abroad reduces U.S. exports
If the U.S. imposes a tariff on steel imported from Europe, European exports to the U.S. decline. In Europe, lower sales to the U.S result in lower production, less employment and lower income. Consequently, European consumers have to reduce their expenditures on goods and services. This also applies to U.S. products. Hence U.S. exports decline and thus employment and income in the U.S.
# 5: Retaliatory measures of foreign economies reduce U.S. exports
Probably the most serious threat to the U.S. economy results from retaliatory trade measures from those countries which suffer from U.S. import tariffs. It is quite reasonable that these countries will respond to the U.S. tariffs with protectionist measures against U.S. products. The EU, for example, already announced that it will impose such trade countermeasures.
Conclusion about punitive tariffs
All in all, trying to improve the economic development at home by protecting the domestic economy from foreign competition is no winning path. Instead of increasing employment and income, lower economic growth, higher unemployment and lower income are the likely consequences. Especially if other countries respond to U.S. protectionism with retaliatory measures against the U.S. economy, this could be the starting signal for a global trade war. In such a development, there can only be losers.