Trump, Tariffs and The Truth about Trade

"The problem with trade is that the costs and benefits are unevenly distributed. The former factory worker who lost his job due to low-cost imports has lost a lot more than you or I have gained from cheaper goods."

On the 8th March, Donald Trump signed an executive order imposing substantial tariffs on imports of steel, amongst other products. The Economist rightly described this as, “an act of senseless self-harm” - Trump’s signature move on tariffs will hurt the US economy as a whole but (and this is a very important but) his actions will also help the American steel producers and, possibly, American steel workers as well.

Those who work in the American steel industry argue that it could do with some help. As one American steel worker put it, “The tariffs [Trump] wants to put on other countries? I love it… It’s about time. Because they’ve been doing it to us since what, the 80s?”. There is little doubt that some steel workers have lost their jobs due to foreign competition. In the 1960s, US steel factories employed around 650,000 people, whereas today they only employ around 140,000.

 But to think that the precipitous fall in the number of US steel jobs is solely due to lower tariffs and more trade would also be a mistake. Machines, who have replaced humans in the production of steel, should also take a large share of the blame. And what is true for the US steel industry in particular is true for US manufacturing as a whole: one in three US manufacturing jobs disappeared between 1989 and 2016. Machines may have been  responsible for taking most of these jobs away from American workers but some of these jobs went overseas as a result of lower tariffs and greater imports.

Trump’s answers to these problems are simplistic and wrong but his rhetoric is effective because he alludes to a truth about trade that is rarely acknowledged - lower tariffs and increased trade have caused significant harm to some individuals and communities. Areas in the United States that saw more Chinese imports also saw lower wages and significant falls in the number of manufacturing jobs. It was not a coincidence that these areas were also more likely to vote for Trump in 2016 - his tale of decline and betrayal struck an oddly harmonious chord in the Rust Belt states of Michigan, Wisconsin and Pennsylvania that subsequently handed him the Presidency.

The problem with trade is not that that developed nations like the US or the UK lose out from it. Overall, developed nations do benefit from lower import tariffs and more trade: the goods we buy are cheaper, the costs for firms fall, and more trade helps to reduce the likelihood of war as well. The problem with trade is that the costs and benefits are unevenly distributed. The former factory worker who lost his job due to low-cost imports has lost a lot more than you or I have gained from cheaper goods.

Lower tariffs and more trade have given us more growth but also more inequality; the economic pie is larger but the pieces are more unequal. It does not have to be this way. As a nation, we can harness the benefits of cheaper imports, more trade and more growth to reduce poverty and raise living standards for everyone.

The government can ensure that everyone benefits from trade through taxation and spending. If a worker loses his or her job because of trade, the government can guarantee them a job elsewhere; if their wages fall or stagnate because of low-cost foreign competition, the government can subsidise their earnings to increase their living standards; and if entire swathes of the country see stagnation and decline as factories begin to shut down then the government can invest in those areas to help transform the structure of their local economies.

None of this will happen by chance. Government policy needs to change to ensure that as our nation grows richer from trade, we all become individually more prosperous as well. Otherwise, the demagogic siren calls of nativism, protectionism and xenophobia will only grow ever louder, resonating with those whose lives have become more precarious with more trade, and, perhaps, reaching a crescendo with our own Trump-like Prime Minister.


Jeevun Sandher is a Young Fabian and contributing writer for Antics. Follow him on Twitter at @JeevunSandher

Do you like this post?