On occasion, Fed economists get things correct even if the voting members get things backward.
For example, New York Fed economists ask and answer the question: Will New Steel Tariffs Protect U.S. Jobs?
Consider this a guest post courtesy of New York Fed researchers Mary Amiti, Sebastian Heise, and Noah Kwicklis. As such I will dispense with blockquotes.
Will New Steel Tariffs Protect U.S. Jobs?
Although the tariffs were introduced under a national security argument, most U.S. imports are actually sourced from U.S. allies. The chart below shows that the largest supplier of steel to the United States is the European Union, accounting for more than 20 percent of its total steel imports. Countries for which the tariff is currently not applied account for 67 percent of U.S. steel imports, although this figure may change as negotiations with the currently exempt countries proceed. What is striking about this chart is the very small share, only 3.5 percent, originating from China. One reason for these trade patterns is that a large portion of imported steel, particularly from China, is already covered by special tariffs.
As the next chart shows, employment in the steel industry has been on a downward trend for decades. The industry, narrowly defined to only include workers where the steel tariffs apply, just employs 140,000 workers in total. In addition to import competition, rapid technological progress such as the introduction of mini mills has been blamed for displacing workers. As the chart shows, steel output has been fairly stable over the long run, and so output per worker has been on the rise. Since 2000, employment in steel production fell 33 percent while output per worker increased 43 percent (an average of more than 2 percent a year).
How do steel tariffs come into the picture? A tariff increases the price of imported steel, and it enables domestic steel producers to also increase their price. Research on markup adjustments more generally shows that a 10 percent increase in competitor prices leads to a 5 percent increase in domestic prices. With a 25 percent tax on imported steel, local steel producers can increase their markups and prices, and still stay competitive relative to foreign-produced inputs. This is the so-called protection that tariffs confer.
However, firms that are dependent on steel and aluminum inputs—both importers and non-importers—will face higher prices. Downstream domestic producers will have to increase their prices or reduce markups, which makes them uncompetitive relative to competing imports. Similarly, U.S. exporters that need steel or steel-related inputs will face higher input costs and will have to either increase export prices or reduce their profit margins. These effects could lead to lower employment in these steel-intensive industries and possibly plant shut downs. Researchers estimate that the number of jobs in steel-intensive industries, which they define as industries with steel inputs of at least 5 percent of total, is around 2 million—for example, manufacturers of auto parts, motorcycles, and household appliances.
It is in steel-related industries where jobs are likely to be at risk. To get a sense of the magnitude of the employment effects, we can turn to a similar episode in 2002 when President Bush introduced steel tariffs of up to 30 percent, although under different legislation. Studies of these tariffs found evidence of higher steel prices and job losses of 200,000 across the United States. This number is higher than the total number of workers employed by U.S. steel producers (187,500) at the time.
In principle, workers who lose their jobs in steel-related industries should reallocate toward jobs in other industries as the economy rebalances. If this process were frictionless, the impact on unemployment would be short-lived. However, research has estimated that average moving costs between sectors are high and therefore the reallocation process is slow. As firms in steel-related industries become less competitive, average wages in these industries are therefore likely to decline, and workers are likely to remain unemployed for some time.
The negative effects of the steel tariffs could be amplified if there is retaliation by other countries. China has already retaliated against the steel tariff by imposing tariffs on $3 billion in fruit and meat imports from the United States. Similarly, after President Bush imposed the 2002 steel tariffs the EU challenged his decision. The World Trade Organization declared the tariffs illegal and the EU was given authority to impose $2 billion in retaliatory sanctions against U.S. products.
In another case, when President Obama imposed a 35 percent tariff on Chinese tires in 2009, China immediately responded by imposing restrictions on U.S. shipments of chicken parts, which cost American chicken producers $1 billion in sales in 2011. Estimating the cost of a trade war is challenging because historically there have been so few. But one study does estimate the cost to be 3.2 percent of real world income.
Although it is difficult to say exactly how many jobs will be affected, given the history of protecting industries with import tariffs, we can conclude that the 25 percent steel tariff is likely to cost more jobs than it saves.
Mish Comments: Escaping the Wrath or Trump
That tariffs would cost US jobs was perfectly clear from the day Trump announced the tariffs.
I have commented on that aspect on numerous occasions, well before Trump announced the tariffs.
For the origins of the US trade deficit, please see [Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?](Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?)
Europe and Canada now struggle to escape the wrath of Trump.
Tariff Irony
China, which is barely impacted by new steel tariffs responded with its own tariffs that will cut US exports to China.
The question is not whether jobs will be lost, but rather how many US jobs will be lost as a result of these tariffs.
Meanwhile, the Bloomberg Econoday parrot offered this inane comment: “The details on tariffs are very welcome in what however is yet another subdued Beige Book, one that isn’t signaling an increased pace of rate hikes for the Federal Reserve.”
For tariff discussion, please see Fed’s Beige Book Notes “Dramatic” Increases in Prices Due to Tariffs.
Rate Hike and Inflation Irony
Undoubtedly, the tariffs will slow the global economy, US included, yet the tariff-related price hikes have nearly everyone concerned over inflation.
Economists and market participants have inflation concerns ass-backward.
For rate hike and inflation irony, please see Belief in Inflation (And 4 or More Rate Hikes in 2018) Picks Up.
Mike “Mish” Shedlock
The problem is quite different, and difficult to blame on the political class. The good thing about the imbalance of trade is that it dramatically increases the standard of living in a country like the US, and while it creates jobs in a country like China, it dramatically decreases their standard of living. Thus, instead of paying $800 for a vacuum, and $4000 for a smartphone, we can buy them for about a fifth that price, and meanwhile many Chinese workers have little ability to buy consumer goods. In a dictatorship, the Chinese leaders can impose decisions on their people that hurt them in the short run, but which may well benefit them in the long run.
Meanwhile, that would never work in the US. Let’s suppose we do have a trade war, and we succeed in driving up the cost of all consumer goods to a point where it is possible to make them in the US. Suppose that suddenly every consumer good cost 2 -5 times as much. Would the country be better off, in the long run? Possibly, or possibly not. Would the people be significantly worse off in the short run? Without a doubt.
I would argue that you could accomplish the exact same thing via another bizarre thing, something that will obviously never happen. Suppose you replaced the the minimum wage law, with a maximum wage law. The result would be a dramatic drop in the standard of living, and making manufacturing in the US instantly viable again. Everyone would be able to get a job, but would have a lower standard of living than they do now. That’s the exact same result, so, if this result is such a good thing, why don’t we hear anyone asking for this solution? The answer is simple – the result is not what they want at all. They want the tariffs because they don’t understand what they are asking for, and they think they can have their cake, and eat it too; they think they can have manufacturing in the US, and also have cheap consumer goods, but the two are currently mutually exclusive.
I say currently because, as automation replaces labor, the ability of a country to steal manufacturing jobs using cheap labor will vanish. Once factories are all largely automated, they should return to the US. At that point, the costs of shipping (as well as the cost of intellectual property theft) will out-weigh the minor savings in labor. That will bring jobs back to the US in terms of maintenance jobs, to keep the machines running, and to keep the factories clean.
Realist wrote — very unrealistically: “Trump is appealing to those who think that tariffs will magically transform the US back to 50 years ago …”
Realist, there is no need to resort to creating unrealistic straw men. If that is the best argument you have, then you don’t have much of a case. That would be equivalent to a straw man saying those who argue for reducing US tariffs to zero believe that China would immediately follow suit, thereby establishing true Free Trade. Since US tariffs are already one tenth of China’s, and China has not cut tariffs, the Free Trader (strawman) argument is obviously nonsense.
A better analysis would be to note that many realists are coming to recognize that the US Political Class has mismanaged trade and industry for decades, resulting in massive loss of jobs & revenue and an unsustainable trade deficit. Lots of things need to be changed, and we have to start somewhere. Encouraging reciprocal fair trade is a reasonable place to begin — although it will not be enough to correct the problems our Best & Brightest have created.
Fed economists are brilliantly credentialed, but not necessarily well educated. Is there an element of the “Post Hoc, Ergo Propter Hoc” fallacy in their very approximate analysis? Tariffs rates were increased and employment went down — so it must be causality, must it not?
Mish has written a lot about automation, which has been going on for years already — that cuts jobs. Businesses have reorganized, so that (eg) the canteen workers now work for a contractor, not the steel company — that cuts the number of “steel workers”. China has been waging mercantilist trade war against the US for the last two decades, which resulted in huge job losses. The US Political Class has been imposing more & more stringent regulations on US businesses, encouraging offshoring of production. Net result is something like 50,000 factories in the US closing down during Barry’s reign, cutting into the market for US suppliers.
But the Fed, whom we all trust & respect, says it is all due to tariffs. Don’t think so!
NEVER trust a Fed “economist,” i.e. globalists Keynesian bullshi’iter.
The real winners are the Fed economists who get paid handsomely (hey, where did that money come from?!) to write reports on how dire things are.
I don’t understand why Mish even needs to post this. It’s a given that tariffs on manufacturing inputs hurt manufacturing. The only way it doesn’t is if you also put a tariff on the finished goods. The point of a tariff on steel is to force American Manufacturers to buy American Steel, and drive up steel prices. That does increase steel making jobs, but consider the manufacturers. To the extent that the steel tariff is successful, American car makers have to pay more for steel than European and Asian car makers, and thus have to raise their prices more than European and Asian car makers.
Now, if you put a tariff on the cars, you can force the prices up on European and Asian cars, too, and then American car makers are back on even footing. It isn’t just cars, though – you have to put a tariff on every single manufactured good that includes steel. I’m not a fan of tariffs in general, but putting tariffs on manufacturing inputs in just stupid. There’s no other way of putting it. If you are going to do tariffs, do it on the final goods, not the manufacturing inputs.
“If that is the “upside” then I would want to know how the downside would look like!” A moderately reduced standard of living for the investor class.
What’s so great about “Production has been maintained” when share of production has been declining both within the US and worldwide?
So steel tariffs on Chinese imports affect 3.5% of steel imports, and those imports go into industries where steel represents 5% of the inputs, and … IT IS THE END OF THE WORLD ! Really? Get a grip!
Mercantilist China has been waging a Trade War against the US (and Europe) for about 2 decades, and the results are clear — US workers are suffering. Fed economists, on the other hand, live high on the hog. And with China importing fewer pork products from the US, the bureaucrats will live even higher on the hog !
The basis of any economy is production. It has to be produced before it can be consumed. Printing paper to “pay” for imports from China is not production.
“And the upside is that it is much more difficult to unionize the smaller plants, so there is far less pressure to increase wages than in the past.”
The consequence is that about 63% of Americans cannot afford even a $1000 emergency without going (further) into debt. If *that* is the “upside” then I would want to know how the downside would look like!
That’s not really true. The USA manufactures a lot, as much as we ever have. But the US manufacturing base has dramatically changed over the years. Other than automobiles and a few appliances, the US manufactures very few consumer items. But it does manufacture a lot of products used as inputs in industry. And that means that instead of the giant plants that employed thousands of workers in yesteryear, we have many more, very small, plants that employ a few hundred workers. And the upside is that it is much more difficult to unionize the smaller plants, so there is far less pressure to increase wages than in the past.
only thing ussa manufactures (other than massive propaganda and newspeak)is weopons,can’t outsource that (legally,wink wink),virtually everything that’s not perishable is imported,assemblying is not manufacturing