New Zealand Ambassador to the United States
Tim Groser has held several important international positions in the New Zealand government. He was the New Zealand Ambassador to the WTO from 2002 until 2005. Three years later, he held the position of Minister of Trade for seven years. During that time, he had significant influence on the TPP. Meanwhile, he was the Minister of Climate Change Issues from 2010 until 2015. For obvious reasons, Tim Groser is considered to be an expert on international trade policy.
Due to Tim Groser’s impeccable timing, we spent most of the discussion on the threat of the United States imposing tariffs on steel and aluminium imports. We discussed the three main reasons why Trump is suggesting such tariffs:
- To protect industries needed for national security
- To bring back jobs
- Because he does not believe that other countries will retaliate
First, Trump believes that having our steel and aluminium imported poses a national security threat because it makes the country reliant on other countries for a material necessary for the building of many weapons and machines. He claims that without this tariff, those industries will cease to exist in the United States. While this might be true, the largest exporter of steel to the US is Canada. Through NAFTA, anything produced in Canada can easily be transported into the United States for use. However, with Trump trying to dismantle NAFTA, it would make sense that he is trying to reestablish those industries back on domestic soil.
The main issue with Trump’s protectionist approach is the complete disregard for the concept of comparative advantage. Trade results because countries specialize and produce certain goods more efficiently than other countries. If both countries trade in what they are good at, the overall efficiency of the economy goes up. If however, both countries are forced to make both products, neither country can really specialize. So, the collective efficiency decreases. By proposing a tariff, Trump is admitting that Canadian companies are more efficient at producing steel and aluminium. So, he is hitting those companies with additional costs to give them a disadvantage. This creates a lose-lose situation.
This bleak situation is furthered by the fact that the steel and aluminium industries are becoming heavily automated. So, it is not so much that jobs are being outsourced, as much as it is machines that are replacing human labor. Thus, even if the US reduced its imports of steel and aluminium, this is unlikely to “bring back jobs” as those will go to automated machines.
Finally, Trump does not believe that other countries will retaliate against this tariff. He assumes that the US is too good of a market to pass up. Unfortunately, what he isn’t aware of is that the US has in fact passed unreasonable tariffs in the past and it has been attacked by the other countries. One example is of the US placing tariffs on trucks from Mexico. In order to force the US government to reverse the tariff, Mexico imposed a tariff on key US exporters to Mexico. Those companies lobbied the government over the unfair tariff and the US government eventually reversed its original tariff in exchange for Mexico reversing its retaliation. Another example is more recent of the airplane manufacturing industry. Boeing persuaded the government to place a tariff on a Canadian rival, Bombardier. This antagonized Bombardier and pushed it to sell a majority stake to Boeing’s main rival, Airbus. Then, to add insult to injury, Airbus cancelled its jet engine order from Boeing and decided to buy them from Australia. Not only did Boeing lose the trade war, it also lost business.
Clearly, international trade has substantial benefits that will hit countries hard if they chose to reverse it in favor of a protectionist policy. Tim Groser explained that “the question isn’t whether trade is good but to what extent it’s good.” By this he meant that the aggregate value of GDP will increase when international trade is introduced. The controversy arises when companies start to compare by how much each country is benefiting. Essentially, countries that are only benefiting slightly become jealous of countries that are benefiting a lot. So, they throw a fit and introduce protectionist policies without considering the other consequences. Objectively, the US is not doing poorly. However, compared to how much some other countries have improved, the US hasn’t done so well.
Tim Groser used a metaphor to explain the equivalent of this situation at the beginning of the era of electricity. He explained that when we first discovered electricity, there were two reactions, (1) Wow! I wonder what we could do with this! and (2) Oh no! This is going to be devastating for oil and candle makers. We need to prevent this technology from being used. I like this analogy because it gives us the perspective of time. Yes, electricity was devastating to oil and candle makers. But would you want to sacrifice electricity and innovation in order to protect one industry? I know I wouldn’t. Clearly, in this example, the former mentality is equivalent to trade supporters while the latter mentality equates to protectionist policy supporters.
Through this discussion, I was able to appreciate the complexities of this debate. While I understand the concern of having steel produced abroad, I do not believe that we should restrict innovation simply because it might make something inefficient and obsolete. I believe that we should either find a way to improve our industry efficiency or admit defeat and simply import the good. Moreover, I believe that the few steel and aluminium jobs that are left should go to the older and more experienced workers. They younger ones should be trained in something that will allow them to have a more positive impact on the economy. Ideally, it’ll be a position that requires more skill and is thus better compensated.
In any case, I am interested to see what’s going to happen next.