Why Trade Wars Are Bad Ideas

 

Trade wars are usually inadvisable, if they can be avoided.  Like most ‘wars’ they tend to have hidden costs, abundant problems, and unintended winners (and losers).

The goal of levying tariffs on items is to protect domestic manufacturers and jobs.  For instance, by punishing foreign steel imports with tariffs (or taxes) it creates an advantageous situation for American steel manufacturers.

In a world without tariffs the United States does not have any advantage.  In fact, due to labor costs, adherence to safety standards, and other factors, American steel – despite being of comparable or higher quality – loses.

 

Nation	Cost / Ton
United States	$475
China	$400
India	$425
Turkey	$450

 

Tariffs can Make America Great Again, though!  By slapping a mere 25% import tax (tariff) on all imported steel, suddenly the United States is back in the game!

 

Nation	Cost / Ton
United States	$475
China	$500
India	$531
Turkey	$563

 

Other nations always retaliate, however, and slap their own tariffs on American products.  In our real world case, China is slapping tariffs on a number of US products.

So we end up back at pre-tariff levels, just in different sectors of the economy (i.e. agricultural vs steel manufacturing), with less money for everyone.

How bad can it get?

Well, one of the last times we did this, it deepened the Great Depression.

The Smoot-Hawley Tariff Act of 1930 was designed to protect American jobs by slapping big tariffs on imported goods.  While the stock market had already tanked, thanks to tariffs there was little in the way of market availability for US products globally.  As domestic production recovered, it was forced to stagnate as there was no one to sell to.

A trade war helped exacerbate one of the more traumatic events in American history, and it took an actual war to drag us out of it.

These days everything is bigger, and there is far more to lose…