Sisters Talking On…Tariffs

Point for Discussion

The Federal government is again planning to implement tariffs on imported steel and aluminum coming into the US from all points around the world. The difference this time is that the President is planning to use a less well-known rule to circumvent the usual process of proving damage prior to determining the appropriate tariff level and duration.  Is protectionism the answer in a modern world?

Our Points of View

(Lynn)

This week President Trump announced his intentions for new tariffs on steel and aluminum imports into the US.  The reaction has been swift and harsh, reinvigorating the Free Trade versus Fair Trade debate.  The President stated that these tariffs are required to protect our national security.

Commerce Secretary Wilbur Ross clarified the definition of national security to include economic security as well as border security.  So the creation of jobs is considered a national security objective by the current administration.

The President would like us all to believe that import tariffs will lead to job creation in the US.  It is just not that simple. In order for that to happen, the tariffs would have to be high enough to drive steel and aluminum pricing to a point where companies could justify spending the money to restart idle equipment or build new facilities.  Idle equipment deteriorates over time, especially when you are talking about blast furnaces and firebrick. The costs to reline a blast furnace and prepare it to make iron are very high.  And if we don’t know how long the tariffs will last, this is too big a commitment for a steel producer to make.  Likewise, constructing new facilities is challenging and expensive as well.  We can start with the environmental regulations and continue with the knowledge that much of the equipment required is manufactured outside of the US.  And all of this could take months, if not years, to accomplish.

So, rather than restarting idled operations or constructing new facilities, importers will likely continue to import and pay these tariffs. Wilbur Ross clearly stated that the impact on the price of a can of soup or can of soda would be less than a penny.  While true, this ignores the larger impact to the average household if this action starts a trade war.  While the President would like us to believe that protectionist measures do, in fact, protect the prosperity and security of our nation, there are many risks.

Let’s look at jobs.  The President wants us to believe that jobs will be created by this measure.  I’m doubtful, but maybe a few will be.  We can’t forget about the jobs that could be eliminated if other nations retaliate by taxing US exports thus making them too expensive in other countries.  Exports are a key part of the global economic balance.  If other nations push back on these tariffs by taxing imports from the US, there will be no job creation benefit to this action and there could be some job loss.

Inflation risk will be increased as well.  While we are waiting for existing facilities to be refurbished and restarted, or new facilities to be built, which could take several months or years, the prices of much of what we buy could increase.  By how much?  Individual increases will be small as Wilbur Ross stated, but cumulatively this could be harmful to families.  If wage inflation doesn’t keep up, the pain could be greater.

How does the Federal Reserve manage inflation risk?  By adjusting interest rates.  If interest rates go up, mortgages, cars, credit card debt and interest payments on our national debt will increase. That would not be good for anyone.

Fair Trade sounds less appealing when you take a step back and look at the big picture.

Free Trade allows nations to produce what they can and export to other nations wanting their goods.  This allows these nations to elevate the standard of living for its citizens.  From a big picture standpoint, this could ultimately lead to the end of government supported financial aid to other nations.  And could bring levels of contentment to citizens in other nations freeing their leaders to focus on ways to improve the quality of life for their citizens, shifting their focus to peace, not war.  War of any kind benefits no one.  Trade wars are no exception.

President Trump wants us to believe that tariffs are the right thing to do to protect the US.  The question is, how right do we want to be?

(Laurie)

I agree with Lynn that tariffs can affect inflation, and with much broader economic implications, but I also think that it’s time to step back and re-assess the import/export imbalance, and take action to save and/or rebuild the manufacturing job base in the U.S.  Is there really such a thing as “Fair trade”?  Maybe it’s “Fair-er” trade.

On the surface, “tariffs” may seem like another sound bite, but in fact, it is a behavior with significant  implications to people in the U.S. and around the world.  Tariffs can impact the availability of jobs, the pay rate, and the cost of products that we use every day.

The good news is that with fair-er trade, we can level the playing field, and tariffs can have a role in helping to establish a more robust manufacturing base.  Technologies have changed, and manufacturing can be implemented that is cleaner, safer and more efficient.  Jobs could be created at all levels to develop and run new facilities.  It does take time, as Lynn mentioned, but it would be an investment in our economic base for the future.

The question is, what are the right investments, and in which production areas, so that trade agreements can help set partnering countries, including the U.S., up for success.  I believe that it is a good idea to review trade agreements periodically to ensure that they are in the best interest of each participating country.  Things change, and the impact of decisions often become evident decades later.  It doesn’t make sense to sign and go, and never look back. 

That said, any modifications to trade agreements, should be well thought out, and if done right, can effectively and appropriately protect each country’s production, maintain a manufacturing base, create jobs, strengthen inter-country relationships, and help balance imports and exports – so that each country can actually grow as an outcome – in a scaleable and sustainable way.  There can be a win-win, and reasonable tariffs can start the ball rolling.

I believe that there is a price increase that people will be willing to bear, if reasonable, if it means re-establishing and protecting a certain level of jobs, assuming, of course, that the intentions are just, and the structure of the deal is implemented properly.   But let’s keep in mind the reality that updating trade agreements to represent current economic market forces may not require a price increase at all (e.g., if a certain level of raw materials are available, and if negotiators do their jobs without bias).   Is it really a potential “trade war,” or simply a re-calibration to what works best for partnering countries given market conditions across the globe?

Our Question to you:

Are tariffs, applied as protectionism, the right answer to create jobs and preserve the American way of life?  Why or why not?

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