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Ramping up Tariffs to Spite Trump Is Economic Self-Harm

March 13, 2018 in Economics

By Ryan Bourne

Ryan Bourne

It is not so much what Donald Trump did, but why he justified
doing it, that has got trade experts and US allies worried over the
past week.

In the grand scheme of things, the President’s decision to
impose tariffs of 25 per cent and 10 per cent on steel and
aluminium is not an economic catastrophe.

Sure, it amounts to mild self-harm for the US economy —
raising costs for downstream industries which, on net, could lead
to 146,000 fewer jobs and less productivity.

But there are many ruinous economic policies imposed by
governments around the world, and plenty of countries impose
tariffs. The EU alone has over 12,500, which have precisely the
same deleterious impacts.

Rather than fighting
producer-centric tariffs with producer-centric tariffs, it should
instead put EU consumers first.

No, it’s Trump’s claim that protection is needed for
national security reasons that has really riled everyone up —
especially EU leaders. Not only do they consider it nonsensical
(Canada is the number one exporter of these goods to the US) and
worry that Trump’s use of this justification risks similar
reasoning elsewhere in the world, but as the second biggest source
of US imports of both products combined, Brussels wants to protect
the economic interests of EU producers.

One can understand the grievance and sense of injustice. But so
far the EU’s petty producer-centric response risks making all
the talk of a “trade war” a self-fulfilling
prophecy.

Reacting to Trump’s announcement, EU Commission president
Jean-Claude Juncker said the EU could fight “stupid with
stupid”, targeting tariffs on US goods such as motorcycles,
jeans, and bourbon whiskey — all goods with major producers
in Republican areas.

The aim is to ramp up political pressure on Trump to abandon
them. But this seems a foolish, dangerous approach, both
economically and politically, living up to the stereotypical
anti-American caricature of continental Europeans, and misjudging
the President’s resolve.

From a rational economic perspective, both the US administration
and the EU should recognise that it is domestic consumers who
ultimately bear the majority of the cost of tariffs through higher
prices. If one focuses on this, rather than producer concerns, one
realises that a trade war entails both sides harming their own
economies to try to get the other to back down.

The economic conclusion is that the optimal response to a trade
partner imposing import tariffs is to keep your own trade free,
unless the threat of tariffs can be harnessed to deliver free trade
both ways.

In this case, Trump has made clear he is intent on steel and
aluminium tariffs come what may, as confirmed by his Treasury
secretary Steve Mnuchin and the resignation …read more

Source: OP-EDS

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