Sunday morning on ABC News’ This Week, Commerce Secretary Wilbur Ross made two basic errors discussing Donald Trump’s new trade proposals: He understated both the immediate harm of President Trump’s steel and aluminum import tariffs and the future harm from possible retaliatory actions by America’s trading partners.
Ross: The total amount of tariffs we’re putting on is about $9 billion in a year, that’s a fraction of 1 percent of the economy, so the notion that it would destroy a lot of jobs, raise prices, disrupt things, is wrong.
Yes, $9 billion is less than 1/20th of 1 percent of a $20 trillion GDP. But the costs of those higher tariffs are not evenly dispersed.
The costs will be concentrated on the American products and firms that use a lot of steel and aluminum, and on the consumers who buy those products. The shirt you buy may not get more expensive, but the washing machine, car, and beer can will. The direct harm will fall on those products and firms most sensitive to changes in those input prices.
In addition to harming Americans who buy and build appliances, vehicles, and containers, President Trump’s import tariffs target other Americans for harm. Farm equipment will cost more. Homes and office buildings will be more expensive to build, buy, and rent. Bridges, rails, and tunnels will cost more. So will cell towers, pipelines, power plants, and water pumping stations. Agriculture Secretary Perdue and Transportation Secretary Chao cannot ignore these costs, even if Commerce Secretary Ross does.
Within any given budget, the Pentagon will be able to buy fewer rifles, bullets, tanks, ships, and airplanes. Secretary Mattis will get less bang for the buck.
There is indirect harm not included in Ross’ $9 billion number: Tariffs distort prices and decision-making, misallocating society’s resources and making everyone worse off.
Two years ago, Ford changed their F-150 truck, from mostly-steel to mostly-aluminum. The Trump tariffs not only make the aluminum F-150 more expensive, they change the economics that led to Ford’s product decision. Multiply that effect times thousands of products across hundreds of firms. Add in the unpredictability of the duration of these distortions and how much harder that makes business decisions. Again, these costs are omitted.
Ross ignores downstream effects, too. The Ford truck salesman working on commission suffers when truck prices increase. Does President Trump understand he is temporarily tilting the competitive landscape between steel-based and aluminum-based trucks?
Secretary Ross made similar mistakes on the harm caused by retaliatory tariffs:
Ross: As to the idea of retaliation, sure there may well be some sort of retaliation, but the amounts they’re talking about are also pretty trivial, some $3 billion-odd of goods that the Europeans have threatened to put something on. Well in our sized economy, that’s a tiny, tiny fraction of 1 percent. So while it might affect an individual producer for a little while, overall it’s not going to be much more than a rounding error.
First, Ross includes in his number only the three products (Kentucky bourbon, Levi’s blue jeans, and Harley-Davidson motorcycles) explicitly threatened by European Commission President Jean-Claude Juncker, so far. What makes Ross think retaliation would be limited only to these products, and only to the European Union? America’s largest sources of imported steel are Canada, Brazil, South Korea, Mexico, Turkey, and Japan. (China is 11th.) If any of them retaliate, both the number and scope of products affected increase.
Second, Ross concedes that the pain of retaliation will be concentrated on specific firms, and then uses that as a reason not to care. Are Jim Beam, Heaven Hill, Levi’s, and Harley-Davidson less valuable to America than Nucor, ArcelorMittal (based in Luxembourg), U.S. Steel, and Gerdau (based in Brazil)? Why should the president force these first four firms to suffer so the steel giants can avoid competition? Indeed, the smaller the company, the more vulnerable it may be to foreign retaliatory actions. Someone should ask the president whether he agrees with his Commerce secretary that the American companies and workers building Harleys, distilling whiskey, and making blue jeans are “rounding errors.”
Third, Ross says such pain might ”affect” (harm) an individual producer “for a little while.” He cannot possibly know that. The duration of a retaliatory tariff is a function of how long the president keeps his tariff in place, when and for how long the retaliatory tariff is imposed, and the outcomes of subsequent fights in the World Trade Organization’s dispute resolution process. President Trump hints his tariffs will not be short-term, and neither Secretary Ross nor anyone else knows the other two factors yet.
Finally, remember that these two effects are separable. Import tariffs harm Americans even if no one retaliates. On the recommendation of Secretary Ross, President Trump has started a global trade war by mining American harbors.
Keith Hennessey teaches economic policy at Stanford Graduate School of Business. He served as director of the National Economic Council for President George W. Bush.