Leibowitz on Trade: The Riddle of Steel and Aluminum Tariffs—Lessons from Afghanistan  

The limitations of government’s ability to change behavior has never been clearer than the recent collapse of Afghanistan’s government.  For 20 years, the U.S. attempted to build a stable and democratic society based on respect for human rights and the “pursuit of happiness.”  The United States spent more than $1 trillion in the effort. In the end, all that money and all that effort could not build that society; although the Afghans made considerable progress, at least until last week. 

The American impulse to do good in the world has a long history and deep roots.  Our very first national document, the Declaration of Independence, states that “We hold these truths to be self-evident: that all men are created equal.”  Not just all Americans, but all people (in 1776, and into my lifetime, “men” in that context meant “humans,” not just males). In 1940, the almost totally forgotten Senator Kenneth Wherry said of U.S. China policy, “With God’s help, we will lift Shanghai up and up, ever up, until it is just like Kansas City.” We succeeded a few times in building a sense of purpose in countries that had not known it before, such as Germany and Japan after World War II, as well as Taiwan and South Korea. In many other cases, however, we failed utterly: Vietnam, Cambodia and Laos, Iraq, Libya, and, now Afghanistan.

That brings me to the tariffs. The United States still leads the world in many ways, including economically. But we are fooling ourselves and everyone else if we think that imposing tariffs on friends and adversaries through economic punishments will convince others to change their behavior. It won’t and it never really has.

The China tariffs resulted in a “Phase One” agreement, largely symbolic, in which China agreed to buy more “stuff” from the United States. However, that agreement has not been lived up to. And the problem of China increasingly asserting itself in world affairs, geopolitically and economically, remains real and is getting worse, perhaps not despite the tariffs but because of them. 

In the meantime, American companies that were told for years by their government to integrate their operations with Chinese partners, find themselves addicted to China as a supplier of many goods. They can’t quit. 

The world has moved on in the last 30 years; America simply cannot “reshore” the light and heavy manufacturing industries that relocated operations to China without massive dislocations. They are not coming back here. The U.S. is too expensive and too sensitive to labor rights and the environment to return to the “good old days.” 

The manufacture of steel and aluminum have also fundamentally changed. In 1870, the United States produced about one-fourth the amount of steel as Great Britain, the leader of the Industrial Revolution. By 1913, the U.S. made three times as much steel as Britain. In only four decades, the world changed. 

China has done the same thing, only more so. By the mid-1990s, China’s steel production passed the United States, up from about 1/20^th of the U.S. in the 1970s.  The decline of the United States as the world leader in steel production was not caused just by foreign subsidization. There were many other factors, including a lagging interest in modernization of steel production in this country and the rebirth of steel in many countries that had been devasted in the Second World War. 

U.S. policymakers have a habit of fooling themselves into thinking that the U.S. can, through government policy and programs, convince other countries to act in our interest rather than their own. But governments around the world will generally act in their interest, not ours. We seem to need a refresher course in that reality from time to time.

The Section 232 tariffs on steel and aluminum have not led to a significant increase in American steel production since 2018. Nor are they likely to. Indeed, if protective tariffs on steel become a permanent feature of the economic landscape, leaving the U.S. an island of high prices, manufacturing will move offshore at a faster pace than before. 

Europe and the UK have leaned on the United States to revoke the steel and aluminum tariffs on those countries. But now, downstream manufacturers in Europe and Britain are worried that the end of steel and aluminum tariffs will spur exports to the U.S., making steel and aluminum more scarce in Europe and increasing prices there. The end of tariffs will have consequences, as did their imposition in the first place. The government cannot do it all, as we just learned all over again in Afghanistan. 

We need to rethink what our problems are and how to enlist more people in addressing them. Because government, like everyone else, is imperfect, maybe we should think about ways forward that do not rely on government regulation as the “fix.” I think markets have been underappreciated as an engine of prosperity and progress. Maybe we can start there. 

I hope to see many of you at the SMU Steel Summit on Aug. 23-25.  It’s available remotely too—for those of you who won’t be there in person, I’m looking forward to 2022.   

Lewis Leibowitz

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