Tariffs: Expectations vs. Reality

The purpose of Trump’s steel and aluminum tariffs is to protect  domestic suppliers and firms as well as to encourage steel/aluminum production in the United States . Tariffs, in general, are a tax on imports to increase the price which results in a larger producer surplus, revenue collected on account of the tariff, and deadweight loss. Overall, tariffs create market inefficiency and hurt the wellbeing of an economy because of it.

Of course, there are many more factors to think about. The market for steel and aluminum affects much more than just those involved in the production. It affects all the other industries that require these metals to produce other products: cars, laptops, and even canned whipped cream! The tariff on the steel or aluminum required to produce these products raises the cost of production, shifting the supply back, and producing less at a higher cost. The implications of this result in a loss of profit and potential unemployment as less labor would be required. In fact, the last time the United States imposed steel tariffs, steel users blamed the measures for the loss of up to 200,000 jobs.

In addition to domestic costs, there are foreign costs associated with tariffs as well. The increase in the price of a good causes less consumption and when a good is valuable, the decrease in consumption can cause the country supplying the good to lose billions of dollars (as we are seeing in the case of the steel/aluminum tariffs affecting China). 

The last danger of imposing a tariff is retaliation resulting in a trade war where both countries are deliberately – through tariffs, tring to make the other worse off by limiting or ending trade. Not only is this a severe economic inefficiency, but also a race to the bottom that can have drastic political consequences.


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