BIPP: Effects from new tariff on steel and aluminum imports will reverberate throughout the economy

Yiwei Wang and Andrew Schlicht

President Donald Trump proposed a new tariff March 1 on steel and aluminum imports, levying a 25 percent tax on imported steel and a 10 percent tax on imported aluminum.

This news surprised many across several industries, including automotive, soft drink, and construction firms. All of these industries rely on aluminum, steel, or both, as their primary input resources. In fact, the Dow Jones industrial average dropped 420 points after Trump’s announcement, signaling uncertainty and fright in the market’s near future.

Additionally, the new tariff proposal invites criticism from governments around the globe. Aluminum and steel are heavily traded and both minerals are essential to economic development. Therefore, it is in developing countries’ interest, such as China and India, to protect the fairness of the trade. For instance, China recently sent a top economic adviser to Washington to hold negotiations with the U.S. government. So far, little progress has been made.

Trump mentioned in a recent tweet that “trade wars are good, and easy to win” for a country like the United States. Should a trade war really happen, the country that suffers economically as a result of the tariff is going to retaliate by imposing similar tariffs or even sanctions on American imports. For example, China may impose stricter regulations on U.S. imported soybeans and may scale back on the purchase of American goods such as aircrafts and machinery weapons. According to the Wall Street Journal, business and trade experts from both China and the United States expect “future retaliation will also likely target industries and regions seen as supportive of Mr. Trump.”

With such tariffs in place, political relationships will be greatly damaged and future cooperation on other global issues, such as global warming, will also be discouraged.

Another important part of every tariff is how it impacts the domestic economy of the country implementing the trade policy. To best understand the tariff’s possible effects, one should consider the fundamental basics of a tariff and proceed from there. In his 1946 book “Economics in One Lesson,” journalist Henry Hazlitt discussed this very topic and his viewpoint remains valid today. Hazlitt wrote that an increase in prices for a material that is so fundamental to the economy will reverberate throughout the nation. If the proposed tariff is implemented, the price of steel and aluminum will undoubtedly increase, yet the extent of this increase is difficult to predict.

However it is important to realize that increases in steel and aluminum prices will have far-reaching effects on the economy. Construction will slow as building costs rise, car prices may increase as the steel chassis and aluminum engine blocks become more expensive to manufacture, and countless other sectors of the economy will be affected by the tariffs.

This ripple effect has the possibility of carrying as far as college tuition hikes because universities need steel and aluminum for new buildings, and what may be a good deal for domestic steel and aluminum producers, could have a harmful effect for consumers.

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