Despite a recent rally in global markets, the Trump Administration’s tariff announcements, which include but may not be limited to steel and aluminum, have sent shockwaves through the world, sparking fears of retaliation, trade war, and even a global recession. While a tariff on aluminum and steel alone likely will not derail the US economy, a clear shift in economic policy toward protectionism (for the first time since the Great Depression), certainly could.

President Trump, elected largely on his platform as a businessman, with ostensibly greater economic clout than a typical “swampy” politician, has gone against all conventional wisdom with these tariffs, and certainly with the blustery rhetoric that accompanies them. The vast majority of economists, backed by history, assert that tariffs do not benefit the economy and carry a risk of serious fallout if escalating retaliation occurs.

Sound Policy, or Political Noise?

Mr. Trump’s protectionist leanings, tariff-friendly stance, and assertion that “trade wars are good and easy to win”, aren’t going to win him too much applause among the experts. Generally speaking, economists don’t like tariffs, and they certainly don’t like trade wars, especially with friendly nations. But what exactly is a trade war, how does it relate to tariffs, and what does President Trump hope to gain for the United States or himself? Equally importantly, how will We the People feel the effects of these decisions?

Tariffs: A Tried and True Failure

A tariff, as the reader likely knows, is a tax on imports, generally implemented to raise revenue or to protect a certain industry. In this case, the focus is on two metals that the United States produces domestically: aluminum and steel. Tariffs have always been tempting for leaders, especially in tough times: keep domestic industry alive while filling government coffers with taxes collected on imported goods.

We’ve Been Here Before

For this reason, the United States has gone down the tariff road many times in history, almost always with disastrous consequences. Herbert Hoover, the republican president who had the misfortune of starting his presidency with the Great Stock Market Crash of 1929, made a historic blunder by introducing heavy tariffs to try to protect US industries. The result was a much deeper slide into the Great Depression, as nations around the world followed suit with escalating trade barriers.

We have a more recent, and relevant, bit of history to reference when it comes to tariffs. President George W Bush, in 2002, also (briefly) introduced a tariff on steel in order to protect the industry. With the help of Trade Partnership, LLC’s 2003 report on the tariffs, let’s assess the effects and fallout. The graph below show some of the effects of this move:

 

We see that, following the tariffs in early 2002, US steel prices soared relative to prices in Europe. What did this mean for the US economy as a whole?  

Well, as one would expect, the US steel industry was happy. High steel prices meant greater profits for steel producers, and job security for steelworkers. Unfortunately, nothing is free in economics. The high price of steel, a major input in manufacturing, meant higher costs for many other industries, including technologies and automobiles, which ate into profits and were passed onto the consumer. To quote the same 2003 study:  

“Thus, American steel consumers have borne heavy costs from higher steel prices caused by shortages, tariffs and trade remedy duties. The worry of many proved true: that the high prices would cancel or delay the manufacturing recovery that had begun to show signs of finally materializing…More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself 

Higher costs on all of these steel-intensive goods meant other industries, and virtually all consumers, were stuck footing the bill for the steel industry’s windfall. However, the party didn’t last long for steel; the administration backed out of the tariffs in early 2003, as Europe began to threaten retaliation.  

Ultimately, the United States did not even enjoy a net economic benefit from these brief steel tariffs, and that was without any country retaliating with counter-tariffs. In a trade war situation, many American industries would not only feel the pinch from high input prices, as in 2002, but also from retaliatory tariffs on exports ranging from agriculture to natural resources. This is when we start to enter “trade war” territory, and when the potential damage really sets in.  

A ‘Friendly’ War  

Donald Trump seems to be under the impression that a trade war, or the threat thereof, with allied nations such as South Korea or Germany, will only lead to “winning”. He seems to think also that this would somehow take place in a diplomatic vacuum, isolated from our overall relationship with these countries. If this is the case, he is sorely mistaken. 

A trade war involves using trade barriers, largely through tariffs, to inflict as much harm on the other country as possible, generally at the expense of your own country’s economic well-being. Much like imposing sanctions on a country, it is all about how much pain you are willing to inflict on the receiving country, while incurring economic costs yourself.  

To understand why a trade war with allied countries, large or small, is a bad idea, consider the definition above. First and foremost, a trade war with a friendly nation is an inherently flawed geopolitical strategy, because it necessarily weakens both countries economically, and undermines their alliance. A trade war with a NATO ally, such as Turkey, means two weaker NATO states with fewer resources, and a more strained relationship with one another amidst already difficult geopolitical circumstances. This is bad policy, but if a trade war with an ally is a bad idea, what about with a… not-ally? 

A Trade War with China: Not Easy (or Possible) to Win 

Although China can hardly be called a friend to the United States, and certainly not a formal ally, a trade war with the world’s second largest economy would not bode well for the United States. The US’ largest trade partner, and greatest foreign holder of US debt, naturally has the power to inflict great damage. One industry that is particularly vulnerable is the US agriculture industry, a net exporter to China. If this trade row escalates into a trade war, American farmers, a key part of Trump’s base, may be hit hardest of all 

It is fair to assume that President Trump has two major goals with regard to his tariffs and aggressive trade rhetoric: scare trade partners to the negotiating table, and shore up his political base. Steelworkers and other industrial producers, historically democratic voters, were instrumental in carrying Trump to the presidency. They are no doubt happy to see the president fighting on their behalf, and Trump is the first person to know this. To get reelected by this key part of his base, he has to make some bold moves to earn their support, including tough talk and tariffs.   

Trump also has demonstrated a penchant for making a big, scary moves on the world stage, and then moving to negotiate, sort of like one guy playing both the bad cop and the good cop. We saw this with the bombing of the Shayrat Air Base in April of 2017 followed by a commitment to focus on ISIS, the escalation of rhetoric against Kim Jung Il followed by agreeing to meet with him, and now we are likely seeing the pattern play out with these trade war threats. Based on this idea, Trump would seek to use the fear created by his erratic behavior to secure more favorable bilateral trade deals. Flawed or not, this seems to be his logic, and is consistent with his approach in previous instances. 

Impact on Muslim Communities 

As one may have guessed, Donald Trump did not institute these policies with the best interests of Muslim Americans in mind. It is worth noting that economically, the Muslim community in the United States is similar to a cross-section of the general American population, although it skews a bit wealthier and more educated. This means that a trade war, or some version of one, will have a largely negative impact on Muslim Americans, as it will on the US at large.  

Many of the jobs held in the Islamic American community are in the professional fields: medicine, law, finance, etc. Like most Americans, many other Muslim Americans work in various capacities in the service industry, or as business owners. These jobs all ebb and flow with the greater economy, so a trade war would naturally have a negative impact on Muslim communities. Since fewer Muslims work in steel or agriculture than the greater American public, the American Ummah may miss the more extreme benefits and detriments of the tariffs. However, it is worth noting that bad economic policy, sooner or later, hurts everyone. 

If Mr. Trump really wants a trade war, he will get it, but it certainly won’t be easy, and, like Hoover before him, he may find himself a one-term president because of it.  


Raakin Iqbal

Co-Founder of U.M. Studied at Georgetown University. Loves Board Games.

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