Today I was driving to work. Yes, I have to work on Sundays. The time on the long drive I use to listen to podcasts or have a conversation with people via phone. This morning I had a call with a colleague in Germany. Topic was the tariffs by the USA for Chinese steel announced by Donald Trump. The discussion started with an article published in small German town newspaper “Neue Presse Coburg” featuring the headline “Strafzölle treffen China hart” which translates to “Tariffs hit China hard”.
As mentioned this started a conversation about this topic. First at all we both are really interested in economics and can say we have a good understanding of that topic. As tariffs go firstly they are hurting people living in the country which the tariffs impose; secondly the country exporting the goods into that country. Let me illustrate this with an example. Country A is exporting a good into country B because it is cheaper as country A can produce it. If both would be companies you would say company A is not competitive enough and would in a long run go bankrupt or would need to become competitive to compete with company B. However, we are talking about countries. Now country A is imposing a 20% tariff on goods imported from country B. Therefore the goods are now minimum 25% more expensive, which makes the goods of country A competitive again. But just due to a price increase, not due to gained competitiveness. That means that consumer in country A pay now much more for the same goods. The end consumer is paying the tariff imposed by their Government. This will hit the low income household the most, of course. Due to the tariff on the goods, country B will export less into country A. Another effect of tariffs is that the not competitive companies do not need to be become more competitive, because they are protected by the tariffs now.
After we have discussed the effects of tariffs the questions is the volume of goods country B is exporting into country A. In this case the countries China and the USA with the good steel. Lets have a look at the figures, shall we. The latest available data shows that the top 10 importer of Chinese Steel are in South East Asia. In 2017 the USA was just on 26th position with only 1.1% (0.08 mmt) of China’s total export of 73.3 million metric tons that year. With that number we can conclude the tariffs will have no effect on both countries. The volume is just too small. Furthermore, the steel exported by China, even considering that China is the world largest steel exporter in the world, accounts just for 2.3% of all goods exported by China in 2016. With those figures nobody will be hurt, not the USA nor China.
That leaves the question why Donald Trump imposed tariffs on China. I have discussed this with my colleague in Germany as well. We came up with a few reasons I will point outÖ
Domestically it shows strength, because Trump is doing something to make America Great Again in the eyes of the American People. They see him doing something, believing the tariffs will save or create new jobs and protect the local industry. As pointed out, they will not due to the price increase when tariffs are implemented and in this case due to the small amount of steel imported from China.
Internationally the US did not put tariffs on the countries they import their steel, which are in that order Canada, Brazil, South Korea, Mexico and Russia. However, Donald Trump looks now as the good guy because he excluded countries in Europe and Australia, which really not export a lot of steel to the US. However, this move gives him leverage in the future on those countries. He can demand a favour in return at a later time.
I hope is not in a case of a war. Just a side note.
That leaves the conclusion: if we can unravel these facts in an hour of a conversation on the phone and another for researching information and data on the web, why do politicians around the world do not see the facts and why do they place themselves in a situation where they have to return a favour when Donald Trump demands it?
Only two explanations come to mind: Our politicians do not understand basic economics or they do not want to understand it. In both cases they play with the wealth and life of their citizen they are responsible for.
Global Steel Trade Monitor. Steel Exports Report: China, 2017, viewed 25 March 2017,
Global Steel Trade Monitor. Steel Imports Report: United States, 2017, viewed 25 March 2017, <https://www.trade.gov/steel/countries/pdfs/imports-us.pdf>