Q&A: Economist Jarrett explains tariffs, trade

Q&A: Economist Jarrett explains tariffs, trade

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Surrounded by U.S. steel and aluminum workers, President Donald Trump signed an order March 8 for a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum to take effect in 15 days. Trump said the tariffs are necessary to protect U.S. industry. Critics say they will have unintended consequences.

Uche Jarrett, an assistant professor of practice who teaches international economics at the University of Nebraska-Lincoln, addresses common misconceptions about tariffs and trade.

Uchechukwu Jarrett
Uche Jarrett

What is a tariff?

It is a tax on imported goods, things coming into the country from beyond its borders.

Who pays the tax?

While the tax may be levied on the supplier of the good, which in this case would be the foreign country, the tax burden will ultimately be shared by both the suppliers and the consumers, which in this case would be the U.S. consumers who end up paying a higher price for their goods.

Isn't it worth it if the United States gets more steelworkers back on the job?

It's not necessarily true that you're going to get a significant increase in the number of workers. Steel and aluminum production is highly mechanized, and steel producers will likely add more machinery than workers. Even if there is an increase in the production of steel in the United States, it does not necessarily follow that employment is significantly increased.

Still, the workers who do get jobs will have more money to spend. Won't that benefit the U.S. economy?

The resulting increase in prices will exceed the increase in wages for steel workers. Not only are you not going to see swelling employment numbers, you also will get a drop in purchasing power.

How do you know the price will go up higher than wages?

Let's say steel prices increase by $100 because of the tariffs. The U.S. steel industry would divide that increased price three ways: for workers, for machinery and for profits. With that simple logic, you're always going to have your price go up more than your wages since each way gets only a fraction of the increase in price.

Don't tariffs affect only the price of imported steel?

Not at all, the price of steel across the United States, both imported and domestic, is going to go up. The tariff reduces the quantity of steel and drives up the price.

But isn't it unfair for China to dump steel in the United States, costing U.S. steelworkers their jobs?

Yes, dumping is an unfair practice that creates problems in the importing country. However, the proposed blanket tariff is not going to hurt China as much as other U.S. trading partners who have been trading with the United States in good faith.

China is not even among the top-five largest steel exporters to the United States. Those are Canada, Europe, Brazil, South Korea and Mexico as of January 2018. (Editors' note: The tariffs imposed by President Trump March 8 exclude Canada and Mexico)

How is dumping defined?

This is when a country exports a good for a lower price than it sells for in the country of production. It does not necessarily mean the product is being sold at a loss. If the U.S. government can establish that China is actually dumping, they should take a case to the World Trade Organization to make China stop.

Could the tariffs start a trade war? What is a trade war?

A trade war is when other countries retaliate with tariffs of their own. These affected countries would place tariffs on goods imported from the United States. They would pick a sector that would cause the most problems for the United States, such as agricultural goods. American exports of agricultural goods to partner countries are staggering in comparison to imports of steel. As of 2016, Canada imports $23 billion in agricultural goods from the United States; China buys $21 billion. Mexico is at $18 billion and the European Union buys $11.5 billion. If these countries retaliate using the agricultural sector, it's going to do a lot of damage.

If I don't plan to buy a car or other durable goods in the near future, won't the impact to my budget be minimal?

The real interesting thing about steel and aluminum is that they are intermediate goods in the production of other things. They will affect the price of canned goods — one estimate by the current administration is that that the price of a can of beer might increase by 4 cents. But every other thing that has aluminum or steel in it is also going to be more expensive. Basically, it's going to take money out of everybody's wallet even in the absence of retaliatory tariffs.