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Will President Trump’s proposed tariffs on steel and aluminium increase economic wellbeing?

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Will President Trump’s proposed tariffs on steel and aluminium increase economic wellbeing?

Answered Same Day Mar 27, 2020

Solution

Soma answered on Apr 05 2020
144 Votes
I. Introduction:
President Donald Trump has signed heavy import tariff on Aluminium and Steel on March 8, 2018. The key objective behind imposition of heavy tariff duty on steel and aluminium is to protect US industry from unfair trade practices. Trump strongly advocates that this move will save the two most important industries of the country that in turn will boost US economy. Steel and aluminium are vital for US economy but they are subject to unfair foreign trade practices for long. Decade long unfair business practice leads to laying off millions of workers and closing down several plants and mills. Trump believed that time has come to protect US industries from all these unfair business practices thus signed this new trade policy. According to this newly proposed trade protection policy, 25% tariff is imposed on steel and 10% tariff is imposed on aluminium. The tariff is levied on the imports from all other countries except Canada and Mexico. The President signed a proclamation with the workers from steel and aluminium industries and officially announced to come in effect within 15 days of time. This move has far reaching consequences not only on US trade scenario- it also has a deep impact on global trade landscape. Most importantly, it has triggers the fear of trade war. (BusinessLine, 2018)
II. Objective of the paper:
The key objective of this paper to critically analyse the potential economic impact of this proposed tariff on US economy as well as its knock-on effects on rest of the world. The primary purpose is to make an in-depth impact assessment of this newly proposed trade protection policy.
III. Rationale behind the proposed tariff plan:
Unfair trade practice from overseas competitors is a long-standing problem for US steel and aluminium producers. China has imposed huge subsidy in metal production that has flooded the global market place with cheap metals hurting US producers. The issue has been addressed long back – various attempts were made to improve the state of US steel and aluminium industry but in effect it has done more harm than good. The trump administration is more focused on national security concerns and find trade protection essential to protect national security. (Irwin, 2018)
IV. Background of the proposed tariff on steel and aluminium:
Trump’s proposed tariff plan was announced after the thorough investigation on the cu
ent state of US steel and aluminium industry and their likely impact on national security. The investigation made by Commerce Department for long nine months highlights the cu
ent crisis in the industry. The report also concludes that imports of steel and aluminium significantly impaired the national security. This observation actually opens the door for Trump to take such move as he sees fit. Needless to mention, Trump makes this announcement just month after he levied heavy tariffs on solar panels and washing machine aiming to protect the domestic producers. (McBride, 2018)
V. The key objective:
A. Save from unfair business practices:
The key intention of this proposed tariff policy is to save US industries from unfair trade practices. This was an overdue problem for America and urgently needed a solution. Trump viewed unfair trade practice is not merely an economic disaster but also a security disaster. He asserted that this policy will protect US industries and also protect the jobs for Americans. This action is taken after nine months long close investigation done by Department of Commerce. The investigation reveals the growing crisis in steel and aluminium industries that are affecting the national security of the country and recommended import tariff as a proposed solution. (BusinessLine, 2018)
China has been long blamed by steel and aluminium producers across the world for subsidizing production of metals in violation of the rules for global trade. As a result, the global market is flooded with China’s low-cost product that has put a continuous downward pressure on the price of steel and aluminium. Domestic producers are struggling to survive – many has shuttered their plant and mill and many others have cut back production that led to huge pay off in the industry. According to Trump, it is the responsibility of US administration to protect the domestic producers from “dumping” through imposition of trade protection measures like tariff or quota. (McBride, 2018)
B. Eliminate the trade deficit:
Elimination of trade deficit is another important objective for Trump’s proposed trade policy. Nava
o & Ross, two senior advisors in Trump’s administration urged to eliminate the trade deficit as it remains a drag to growth for long. Since net exports is a key component of GDP, a negative net exports will ultimately pull down the growth, they believed. But it does not make much sense because exchange rate is free to adjust the trade deficit. Moreover, relying only on consumption for growth is not logical. This is because consumption sometimes turned out to be unsustainable if it is consistent with rising debt as it happened prior to the financial crisis of 2008. (Coppola, 2018)
C. Protect national security:
While defending high tariff on steel and aluminium, Trump claims it will protect US national security. China is taking advantages for long relying unfair trade practices, violating the global trade rule and subsidizing their metal production. U.S rarely invokes the national security rationale to raise trade ba
iers. But this time Trump administration provides keen focus on national security issue while announcing the new tariff plan. Trump urged that trade protectionism is essential at this point of time to protect the national security. (fernholz, 2018)
VI. Welfare effects of import tariff: theoretical interpretation    
Economic theory defines tariff as a tax imposed on imports to protect the domestic producers from global competition and also to save domestic jobs. The direction and magnitude of effects of import tariff to consumers, producers and government are significantly different. As far as the consumers are concerned, they suffer a loss in well-being because tariff would raise the domestic price for both the imported good and its substitutes. So consumers will end up with paying higher price and thus worse off. The well being of producers of the importing countries will increase as a result of tariff. Due to the rise in the price of their product, the producers will experience a rise in producer surplus. The price rise will covert more output, more employment and higher profit for the domestic producers. Import tariff will generate significant revenue...
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