Does stopping metal imports alone cover the trade deficit of the USA?

Question

This article argues a possible trade war that might start as a consequence to steel tariff:

Appearing at a joint press conference in the White House, Mr Trump was asked how he would avoid his steel tariff “escalating in a trade war”.

Mr Trump responded: “Well, we’ll have to see. When we’re behind on every single country, trade wars aren’t so bad. You understand what I mean by that?

“When we’re down by $30 billion, $40 billion, $60 billion, $100 billion [in trade deficits], the trade war hurts them, it doesn’t hurt us. So we’ll see what happens. "

This article shows the EU's reaction:

European Commission President Jean-Claude Juncker in an earlier statement said: "We strongly regret this step, which appears to represent a blatant intervention to protect US domestic industry and not to be based on any national security justification.

"We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk ... The EU will react firmly and commensurately to defend our interests."

Since both US and EU are huge economical actors, one should expect that such a "trade war" if started, to have significant global economical effects (measured in tens of billion $).

From Trump's declarations I understand that he hopes that a potential trade war to help alleviate the trade deficit, but it is unclear how this would happen, especially when EU very likely to react.

Question: Does stopping metal imports alone cover the trade deficit of the USA?

Answer 1

According to the US census bureau, the trade deficit of the United States in 2016 was $504.8 Billion.

The recent US import tariff increase is on both steel and aluminum. In 2016, the United States imported $21.9 billion worth of steel and $12.4 billion worth of aluminum and bauxite (aluminum ore).

So even if the tariffs manage to reduce the US steel and aluminum imports to zero, it will reduce the US trade deficit by 7% at most.

It is also likely that these import tariffs will increase the cost of manufacturing goods from steel and aluminum in the United States. That means it might get cheaper to import these from abroad and harder to sell them on the world market. This would counteract the trade deficit effect.

So bottom line, this measure alone will not balance the US trade deficit. But it might contribute to balancing it if combined with many more such protectionist measures.

The main beneficiary of this measure will likely be the steel and aluminum industry in the United States. With the competition from abroad off the US market, their products might become a lot more lucrative.

Answer 2

The underlying premise of the Trump administration is that globalization is harmful, at least for the US, due to trade deficits.

The simplified idea is as follows: Assume that the US imports steel, instead of producing it. This means that US Dollars are spent to acquire a resource, where instead American workers could have produced it, thereby creating jobs and increasing the wealth of the country.

Of course, in other areas, the US is exporting products, so only the difference between imports and exports is relevant. And if the US has a large trade deficit, the conclusion is that jobs and wealth could be generated by stopping imports and producing the goods inside the US, while losing exports is a smaller problem in comparison.

Sure, there is the risk of a possible trade war with the EU, China, the BRICS states, most of the world effectively, but this is seen as a lesser problem because mainly-exporting countries have more to lose due to import barriers than mainly-importing countries. So any threats of the EU are perceived as weak, since they would hurt themselves more than the US.

The drawback is that imports are not made out of fun, but because they are cheaper than domestic goods. Lets stay with steel: The US automobile industry needs a large amount of steel. Now if they have to buy American steel, this will make their cars more costly, reducing their competitiveness on the global market and hurting the normal American customer that has to pay more for the car now. It is not without reason that many business people and republican politicians warned the president to not take this step.

But obviously, the Trump administration thinks that the advantages outweigh the disadvantages.

Answer 3

Question: Does stopping metal imports alone cover the trade deficit of the USA?

According to the YTD figures on imports (page 26), the category that metal imports would fall under is industrial supplies and materials and for the category as a whole for January is 47,275 (reported in millions of USD). The items listed in that category that are large figures are mostly not metals, for instance petroleum products, industrial machines, crude oil.

In January 2018, the trade deficit was $56.6 Billion, which means even if that entire category - which is not all metal - was produced within the US, it would not cover the monthly trade deficit for January 2018.

As categories, consumer goods and capital goods except automotive are the largest. In fact, either of those categories - while not enough - would have a large impact on the monthly trade deficit.

Answer 4

Dynamic impact

Others have given static explanations showing that even if the United States imported no steel or aluminum, it would still have a trade deficit. Note that those assume

1. That a tariff could reduce imports to zero. It is more likely that a tariff would reduce imports by just enough to cover the tariff.

2. That exports don't decrease. However, a number of countries are threatening to take actions to reduce US exports. Also, some exported products may be produced with imported steel or aluminum.

3. That the trade deficit is driven by demand for imports. If instead, the US trade deficit is driven by the need to expand the money supply worldwide, then the trade deficit will stay pretty much the same. Either exports will decrease or imports will increase.

4. That the US won't just import something else. For example, if the US doesn't import steel, it might find itself importing iron to make steel.

5. That the US won't stop exporting something. For example, if the US is making more steel, it may have to use more coal. If it burns coal, it can't also export it. Similarly, aluminum is electricity intensive. So the US may have to burn more coal to make electricity to make aluminum.

As noted in each, the assumption is unlikely to hold. So we should expect this to be ineffective at its stated purpose. It is more likely to cause

1. Inflation. Tariffs make things more expensive.
2. Supply chain problems. Some products could become difficult to purchase, cutting into the profits of manufacturers and retailers.
3. Shortages. We don't necessarily have the slack capacity to fully supply demand.
4. Loss of exports. Both because of new foreign tariffs and because of an inability to produce cheap products for export. Remember that some of what the US imports may be used to produce products for export.
5. Job loss. If people are not making products for export nor for domestic use, then why employ them?

Even assuming that a trade deficit is a bad thing, this is the least likely way to reduce it. Better approaches:

1. Stop use of the dollar as a reserve currency. China and Russia would prefer a basket of currencies, so there would be some international support for this.

2. Increase foreign aid by the current size of the trade deficit. Currently, the US sends money overseas in exchange for goods. This powers its use as a reserve currency. The US could just send the money. It's unclear whether doing this would decrease imports or increase exports. It might do both. Of course, this would be politically unpopular.

Are trade deficits bad?

Of course, the concept of reducing the trade deficit causing short term benefits is weak. Currently, the US pays only half price for goods. Instead of having to export as much goods as it imports, the US imports twice as much it exports. In no other endeavor would we describe that as bad.

• If I work only twenty hours a week but get paid for forty, would I complain that I needed to work more?
• If I go to a store and buy $100 of groceries but pay only $50, do I complain that I didn't pay enough?
• If I employ a maid who does forty hours of work but only charges for twenty, do I insist on paying for forty?

Yet the US gets goods (imports) in exchange for money. Since the money is used in international transactions, the US doesn't even have to print it. It's just numbers in some computer database. And people complain.

Who cares about exports? Produce more for domestic consumption. Then we'd have both the jobs and the goods.

There is a long term issue. Eventually people might stop hoarding US dollars and expect goods for them. But if that's really a problem, then end use of the US dollar as a reserve currency. Replace it with a basket that includes other currencies, e.g. the euro and the currencies of China, Japan, Russia, etc. If the US dollar is given the right weight in that basket, it could then maintain the same foreign dollar reserves. That weight may need to change over time, but to maintain the current level, it would go down.

Under such a basket, the US would run a trade surplus. The US would have to export in order to get the new global currency. That would be a big change from now, when the US prints the global currency. There are a lot of potential negatives from doing that. But at least that would work. It would eliminate the trade deficit.

Answer 5

As others have noted, steel is only a small portion of the trade deficit (7%), and a tariff will eliminate only some of steel imports. But consider this: according to this site, "In 2017, total U.S. trade with foreign countries was $5.2 trillion. That was $2.3 trillion in exports and $2.9 trillion in imports of both goods and services." So taking @Philipp 's number of $21.9 billion, steel was less than 1% of imports. Why take steel as percentage of trade deficit, rather than steel as percentage of all imports? The former implies that we are taking steel imports to be independent of exports.

But clearly steel has direct effects on exports (e.g. using steel to make cars that are exported). It also has indirect effects: this tariff may cause the steel industry to hire more people, making it look like it's increasing employment, but most of those people would have been employed in some other industry if they hadn't gotten the steel jobs. So those other industries now will have fewer workers, and will have to deal with the higher costs that will ripple through the economy from the increased cost of steel. It's reasonable to suspect that this will decrease exports. On top of this, if we're importing less, then this will likely strengthen the dollar. While that may sound like a good thing, that means that our exports will be more expensive, again lowering exports.

How much will it decrease exports? It's hard to say, but a good starting point is the assumption that decreasing imports will decrease exports proportionally, making the 1% number more relevant than the 7% one.

But it's quite possible that tariffs might not decrease the trade deficit at all, or even increase it. Note that it's mathematically impossible for a country to have a trade deficit unless we define some things as not being "exports". For instance, the US budget deficit is financed by treasury bonds. Some of those bonds are bought by foreigners. The US is, in some sense, exporting treasury bonds. But this isn't considered a "real" export. The "trade deficit" is simply the net sum of these assets that have been excluded from consideration. Will tariffs decrease the US budget deficit? Will they decrease the amount of treasury bonds bought by foreigners? Arguably, a contracting economy would decrease the tax base, increasing the budget deficit while at the same time decreasing the domestic market's ability to buy treasuries, leading to a larger trade deficit.

And that's not even taking into account the possibility of retaliation.