On Thursday, President Trump announced that he will impose tariffs of 25% on steel imports and 10% on aluminum.
The announcement has led to sharp criticism from other countries. Even many Republican leaders have stated that tariffs will end up hurting American companies, workers, and the U.S economy.
Why did the announcement cause such a negative reaction? What exactly are tariffs? Let's take a look.
What Are Tariffs?
Tariffs are taxes on goods and services that are imported into a country. As an example, a 25% tariff on steel means that every $100 worth of steel purchased from a foreign company will now cost $125. One reason given for tariffs is that it helps make locally produced steel more attractive to buyers, thus protecting domestic companies and workers’ jobs. The United States is not the first country to use tariffs, nor is this the first time we have imposed them on other countries.
Why Did Trump Impose Tariffs?
American steel and aluminum companies have complained for years about unfair practices by other countries, particularly China.
China's government gives subsidies (money) to their manufacturers to encourage production. This has caused the global marketplace for metals to be flooded, bringing down prices and making it less economical for American companies to produce steel and aluminum. In the past, the United States has imposed many trade sanctions against China to prevent these unfair practices, but has not had much success.
President Trump invoked a little-used law to argue that imports of steel and aluminum put American national security at risk. If the American steel and aluminum manufacturers are not in good health, they cannot produce enough metal to make fighter jets and armored vehicles. Therefore, the United States will be vulnerable during times of conflict.
Why The Negative Reaction
Economists are concerned about the effect of tariffs on local U.S companies.
American companies import about one-third steel and more than 90% of aluminum used in products such as cars, beverage cans, and buildings. These companies may decide to pass on the increased costs to their buyers who might hesitate to purchase them. This will hurt the companies that produce them. So while tariffs help retain jobs in steel and aluminum, they may cause job losses in other industries.
A bigger concern is that tariffs might lead to a trade war between countries. In fact, China and the European Union (EU) have already said they will respond with tariffs on a wide range of American products. This could impact American industries as top exporters such as agriculture and aerospace will be especially hard hit.
Trade wars can quickly get out of control. The last large-scale trade war happened in 1930 and it is said to have worsened the Great Depression by reducing the level of trade. Back then, Congress imposed tariffs, called the Smoot-Hawley Act, on almost all imported goods in an attempt to protect domestic jobs from foreign competition. It did not succeed in reducing employment and was removed a few years later.
Sources: NYTimes, Washington Post, NPR, WTO, Wikipedia, Investopedia