Saturday, March 10, 2018

About those Tariff Exemptions for Canada and Mexico ...

I wrote a few days ago with some skepticism about the claim of a "national security" justification for President Trump's steel and aluminium tariffs. When the tariffs were actually imposed, Trump decided to exempt Canada and Mexico.

At a political level, the exemptions for Canada and Mexico make sense. As I mentioned in the earlier post, the US has treaty commitments with Canada going back to the 1950s to integrate their defense-related industrial bases, and there is even a North American Technology and Industrial Base Organization (NATIBO). This is part of the reason why Canada is by far the largest source of US aluminum imports (aluminum imports from Canada are about the same as the combined imports from the next 10-largest exporters to the US, combined). Canada is also the largest source of US steel imports, while Mexico is fourth. And of course, the US is part of the North American Free Trade Agreement with Canada and Mexico, too. Even if Trump wants to renegotiate that agreement, it doesn't make sense to do it haphazardly.

So now we are imposing import tariffs on steel and aluminum on the basis that they are vital to US national security, but the tariffs don't actually affect the main source of steel and aluminum imports, which is Canada.

Moreover, the exemptions for Canada and Mexico make it even less likely that the tariffs can benefit the US economy. Here's why:

The entire purpose of import tariffs is to reduce the extent of foreign competition so that domestic producers can charge more and earn higher profits. (Otherwise, there would be no point to enacting them.) Of course, domestic users of steel and aluminum will pay those higher prices. But at least with a tariff imposed against all trading partners, the higher prices paid by US consumers of steel and aluminum go to two places: either higher revenues for US steel and aluminum producers or higher revenue for the US Treasury. Foreign producers don't benefit.

With Canada and Mexico now exempted from the tariffs, the higher prices paid by US consumers of steel and aluminum now go three places: 1) higher revenues for US steel and aluminum producers, 2) higher revenues for Canadian and Mexican steel and aluminum producers, who will also benefit from the higher price; and 3) higher revenues for the US Treasury.

To understand how strange this is, imagine that someone in Congress proposed this policy to "help" the US steel and aluminum industries. Start by imposing a tax on US domestic users of steel and aluminum, based on how much they used. Then some of the revenues from that tax would be be rebated to US producers of steel and aluminum, some would be sent to Canadian and Mexican producers of steel and aluminum, and the rest would be kept by the federal government.

As I have commented before in the context of tire tariffs imposed by the Obama administration some years ago, this way of trying to assist the US steel and aluminium industry seems literally insane once you spell it out in this way.  It's hard to imagine that even the steel and aluminum industries would favor it. But it accurately describes the economic effect of steel and aluminum tariffs with a Canada and Mexico exemption.