U.S. Economy and Workers Have Most to Lose from Tariff Hikes

International trade policy is more embattled than it has been in decades. Last week, President Trump announced a 25 per cent tariff on all steel imports and a 10 per cent jump for imported aluminum. A few days later, a senior U.S. official declared there would be no exclusions for Canada or others (NAFTA notwithstanding). 

Reactions have been swift. The president of the European Commission threatened immediate retaliatory actions on iconic U.S. exports like Harley-Davidsons and bourbon. China warned against trade restrictions, saying it “will not sit idly by.” Canada, Brazil and others warned of retaliatory action. 

The International Monetary Fund (IMF) warned that such import restrictions are “likely to cause damage not only outside the U.S., but also to the U.S. economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel.” 

A recent economic analysis by IISD not only confirmed the IMF warning but quantified it. Two research economists applied an economic trade model to simulate the impacts of a 20 per cent tariff increase in North American industries such as steel, as well as cement and automobiles.

The key finding is that the U.S. economy and American workers have the most to lose from a 20 per cent tariff hike, at roughly USD 3.4 billion a year in terms of GDP and approximately USD 5 billion in welfare losses.[1] The modelling also showed that nearly 460,000 people would be displaced in the steel industry in the U.S. alone, with a further 240,000 in Mexico and nearly 75,000 in Canada.

However, the biggest loser in North America is the Canadian steel sector, where the 20 per cent tariff increase leads to an output decline of 13 per cent (compared to 6.5 per cent in Mexico).

Our research found that the 20 per cent tariff increase would have a small overall effect on total energy output in Canada, Mexico and the United States. This is an important finding from a climate change perspective. However, it also found that increased trade protectionism would reduce renewable energy, already straining from the 30 per cent tariff increase announced by the United States in January 2018 on solar cells and modules.