Why Trump’s Steel Tariffs Must Be Permanent

President Trump imposed a 25 percent ad valorem tariff on steel. When questioned whether the tariffs were permanent, President Trump’s Senior Counselor for Trade and Manufacturing, Peter Navarro, responded that the tariffs are “permanent because the problem is permanent.”

Navarro is right. America’s steel industry has been brutalized for 50 years by unfair trade with the Third World.

Consider that in 1945, America produced 72 percent of the world’s steel. Now, we produce just 4.2 percent. To make matters worse, America cannot produce enough steel to meet our own demand. Last year, we consumed roughly 100 million metric tons while producing just 80 million metric tons.

Without steel imports, America’s economy would be crippled, and our ability to win a major war would be jeopardized. Therefore, the ability to produce steel is both an economic and national security problem. Permanent tariffs are an elegant solution to both problems.

Tariffs are Forever

We will begin by answering the following basic questions: What are tariffs, how do tariffs work, and why must tariffs be permanent?

Tariffs are taxes levied on imports. They do not apply to American-made goods. Accordingly, tariffs make imported products more expensive relative to American-made products. For example, if America and China both produce oranges at a cost of $1.00 per orange, a 25 percent tariff would raise the cost of Chinese oranges to $1.25—but not affect the price of American oranges. In this way, tariffs create an economic incentive to buy American.

Because tariffs raise the cost of imports, they also remove the economic incentive for American businesses to offshore their production to foreign countries—to move the factories to China, only to try and sell the products in America. In this way, tariffs protect American industries from unfair foreign competition.

At this point, you may be wondering: Why not just make it cheaper to do business in America by cutting red tape and lowering taxes? Should we not focus on competing with China rather than protecting “lazy” American industries?

No. The fact of the matter is that America could usher in a laissez-faire libertarian paradise—no taxes and anything goes—and this would still not be enough to compete with places like India or China. Why? One word: externalities.

From China With Love

Relative to the developing world, America has strict regulations that help balance economic interests with other important societal goals, such as ensuring reasonable workplace standards or protecting the environment. These standards impose costs on producers—it costs money to give workers lunch breaks or to remediate toxic waste spills—and these costs are baked into the final price of an American-made product. The costs are internalized.

On the other hand, countries like China do not have such robust regulations. As a result, their goods are “cheaper” than American goods. At least on paper.

In reality, there is a cost to society and the environment for lax regulations. However, these costs are not paid by the producer. Instead, these costs are paid for by society at large; they are externalized. For example, China’s natural environment has been poisoned by all manner of toxic chemicals and pollutants because the government allowed factories to externalize environmental costs in the name of manufacturing “cheap” goods.

Chinese goods are not cheaper than American goods; they simply do not reflect the full cost of making the product. For this reason, America cannot produce goods as cheaply as China—not unless we are willing to destroy our standard of living—not unless we are willing to sacrifice our environment—not unless we are willing to outlaw morality in the name of business and sell our very soul for profit.

No. Reducing the cost of business to compete with China on price is simply not desirable. Nor is it possible. Remember, even if America allowed manufacturers to externalize all costs, our economy is structurally distinct from many foreign producers, in particular China. In America, private corporations dominate the market. Although these corporations are large, and many are owned by the same few investment firms—like Blackrock—they remain private entities.

This is not the case in many foreign countries, where public corporations dominate the market. For example, Chinese manufacturers are typically backed by the Communist Party’s monolithic might. As a result, Chinese companies can lose money for decades by dumping below-market-priced products until they finally dominate a particular market. At that point, they can then raise the prices to their satisfaction, having carved out an unnatural monopoly.

Unless America nationalized all key private industries, we could not “compete” with China. Therefore, the only way to protect America’s market from asymmetrical competition from countries like China is to price in these externalities by imposing protective tariffs.

As Peter Navarro said, tariffs must be permanent because market asymmetries are permanent. Ultimately, no amount of academic double-speak or libertarian fever-dreaming about free trade will make global competition fair. If we want to reshore American industry, then we must build a permanent tariff wall.