Melina’s Memorandum: A lesson in macroeconomics and tariffs

Starting on Thursday, Feb. 28, President Trump stated the U.S. would impose a series of tariffs on imports despite the dangerous economic implications of limiting free trade. The Trump administration during the campaign trail promoted protecting American manufacturing and restricting free trade with certain countries through tariffs; however, China is not one of the most affected by these tariffs, which the campaign singled out. The imposition of tariffs demonstrates a lack of knowledge of basic economic principles found in the most introductory economics course.

The tariffs, which are taxes on foreign goods coming into the U.S., are often placed to protect the American producer and limit U.S. dependence on foreign products. Specifically, the President set a 25 percent tax on steel, 10 percent tax on aluminum, 2.5 percent tax on foreign cars and 25 percent tax on foreign trucks and vans. By making foreign goods relatively more expensive than American, it makes American goods relatively cheaper, thus skewing the market for good towards the American producer. Keep in mind the American good is just relatively less expensive, but is still more costly than the original import price. Consumers will gravitate towards the relatively cheaper product; however, they will ultimately pay more for that good as a result of the tariff.

The tariffs on aluminum and steel have ramifications on not just American consumers with final goods and services, but also American producers of final products which use foreign steel and aluminum as intermediate goods. Tariffs increase the cost for American manufacturers to produce their good as their inputs are relatively more expensive, and to compensate for that, they raise the prices of their final products. In addition to price hikes, firms who use steel or aluminum as intermediate goods to produce their final product could potentially hire fewer workers as a result of inputs increasing in cost. This, in the end, hurts the consumer who wants to purchase the final good in addition to the worker in industries who use these products. The market for cars and trucks will experience an increase in prices and hurt consumers in the same way.

Overall, the tariff also leads to a gap of transactions that do not occur in these markets because of the higher prices. When consumers, in turn, have to pay more for goods, many choose not to purchase altogether. The people who could only afford the lower price for the products (aluminum, steel or foreign vehicles) will be priced out of their purchase leaving overall consumption in the U.S. economy to be less than it would be in a system without these tariffs. The taxes will also put more American jobs in jeopardy than it would protect in the steel, aluminum and automotive industries. The labor sector for goods protected by the tariff is much smaller than the sector for goods and services that use steel and aluminum as an intermediary.

What the economic justification for the tariffs targeting China’s industries is lacking is the fact that China only comprises a small portion of U.S. aluminum and steel. The taxes in the way the President has proposed them disproportionately affect U.S. allies such as Canada, Germany, and South Korea. The subsequent trade war has thus ensued by our allies who are angered by these barriers, which leaves the entire world market for these goods worse off. This coupled with the fact it hurts not only the U.S. economy by decreasing our levels of consumption, which is directly related to our standard of living, but also jeopardizes many more American jobs than it protects only reiterates that Trump’s economic vision is incredibly short-sighted.