Professor Dr. Gary Galles has taught economics at Pepperdine University in Malibu, Calif., for more than 30 years. His research focuses on public finance, public choice (described as “the economics of government”), the theory of the firm, the organization of industry and the role of liberty, including the views of many classical liberals (now called libertarians) and America’s founders. His books include Faulty Premises, Faulty Policies, Apostle of Peace and Lines of Liberty.
A Pepperdine colleague points out that “Galles’ focus is primarily on using economics tools to understand ‘the real world’ rather than creating theoretically elegant but misleading models divorced from it.”
Galles answered a series of questions posed recently by Aftermarket Business Worldrelating to the initial rollout stages of President Donald Trump’s tariff proposals:
Q: Assuming Trump is ultimately able to enact his announced steel and aluminum tariffs, how would this impact American automakers and American auto parts producers?
A: It would make cars assembled in the U.S. more costly than assembly in Mexico, which does not have such tariffs. More assembly would tend to move to Mexico, worsening our automobile trade deficit with Mexico. This shows one of the unintended consequences of Trump’s policies. Tariffs for steel and aluminum will hurt auto production, which Trump also wants to protect, and undermine another of his stated goals.
Q: How does Mexico’s current level of heightened auto production relate to the pending NAFTA negotiations?
A: Mexico’s auto industry is growing because they have free trade agreements with respect to cars with countries (e.g., Europe) that America does not. A car assembled in Mexico would save a 10-percent tariff selling into Europe, which is big money (far bigger than production cost differences). The way to growth in the industry is freer trade, not added restrictions on trade.
Q: Would steel and aluminum tariffs increase U.S. auto industry manufacturing jobs as Trump has argued?
A: Exactly the opposite. Every real study of protectionism – including President George W. Bush’s earlier experience with steel tariffs – finds far more job losses elsewhere, where the negative effects are felt, than are saved or created in protected industries. It is an example of what Frédéric Bastiat (an influential French economist from the 1800s) described as “what is seen” (pointing to specific jobs created in the protected industry) versus “what is not seen” (the many losses in places that are not easily “proven” to be caused by the losses), because proponents can always say it is due to something else, or taking such a quick snapshot that the effects are just beginning to be felt or that the effects haven’t shown up yet.
Q: How likely is it that a trade war will actually commence concerning the tariffs and/or NAFTA negotiations? Do you think other nations will indeed retaliate?
A: It is hard to know if Trump is serious or just trying to wangle a better deal from NAFTA partners. Even if it is the latter, jerking them around is a great way to poison the well with our largest trading partners, undermining trust and the potential for future gains as well. It is quite likely a trade war of some sort will occur (the changing prospects for which have been roiling the markets and inducing more freedom-oriented GOP members’ attempts to reduce the magnitudes that will be involved), which is quite bad news in even the best case, and will undermine the improved incentives that the tax and regulatory reductions have created.
In the worst case, it is worth remembering that U.S. international trade fell by more than half between the passage of Smoot-Hawley and 1932. In our far more interconnected world, with sprawling international supply chains, the effects could be as bad or worse. In any event, other countries have already been planning how to retaliate in ways that hurt the U.S. worst (like agricultural exports, motorcycles), particularly in threatening Trump’s support. Check out the Wikepedia entry for the “chicken tax” for an instructive illustration of retaliations and their often persistent adverse consequences.
Q: What are some of the possible ramifications for U.S. automotive businesses if the EU retaliates?
A: I don’t see this reducing European tariffs on U.S. cars, but it might increase them in retaliation, harming U.S. production. It would also shift production to Mexico and other locations without the steel and aluminum tariffs (like Korea), although the complex supply chains will mean it will take some time for things to change.
Q: Is it possible that Japan would impose tariffs as well? How would this impact the American auto marketplace?
A: I don’t know much about Japanese situation, so I can’t really say, other than that any response is unlikely to benefit U.S. producers.
Q: China is a particular target of Trump’s ire; how would you assess the impact on the U.S. of tariffs or other protectionist policies directed at China?
A: Since we get very little steel and aluminum from China, the effect of a universal tariff on steel and aluminum on China would be quite small, imposing huge costs on Americans and our other trading partners to accomplish very little, if any, good.
Q: Would similar situations also apply to other Asian nations such as Korea?
A: Actually, the steel and aluminum tariffs will act to help Korean car makers by making assembly in Korea relatively less costly than it is now. It is also not beyond reason that Trump would then bad-mouth them as malefactors and try to double down on his mistaken ideas by raising tariffs on Korean cars like he did with washing machines.