Did Trump Just Help or Hurt the U.S.? Look to Indiana for the Answer

My (new) home state of Indiana is the top steel producing state in the country. It’s also the most manufacturing intensive state. We manufacture a lot of automobile and truck parts here, parts that rely on cheap steel and aluminum. So when assessing whether the new tariffs imposed by President Trump will be good or bad for the country, Indiana’s may be the bellwether state. We may see the impact first — for better or for worse.

Meanwhile, I’m still grinning from ear to ear at the ways the Republican Party has been transformed under Mr. Trump. Who would have thought that the Republicans would become the party of protectionism? Not me. Or anyone else if they’re being honest with themselves.

I’m also taking delight in Mr. Trump’s recent desire to take guns from people without due process of law. All I heard during his predecessor’s administration was the ludicrous fear mongering from the right claiming that Obama was “coming for their guns.” And now it turns out it’s the Republican president who wants to come for their guns. I have to admit taking some perverse delight in the way the worm has turned.

But back to trade. This could well be a train wreck in the making. Or not. Only time will tell. But it’s hard to imagine a good outcome should other countries retaliate, which one would assume is likely.

Of course, protectionist trade barriers are nothing new. Every state in the Union already has them. They’re called licensing requirements, etc. They inhibit commerce across state lines, ostensibly to protect consumers. But that’s often a ruse. Usually, it’s to protect incumbents from competition, thereby propping up the income and wealth of the incumbents (to the detriment of others, of course).

Countries have protective barriers, too. Including the U.S. Just ask any farmer in Brazil or sugar cane grower in any other country. Or foreign producers of any of the myriad of other products that already carry stiff tariffs.

So, despite the impression the press may be giving people, the world isn’t new to tariffs and protectionist policies. That doesn’t mean they’re good. They’re usually not. And it doesn’t mean we should add more. But it does mean it’s not the black and white issue that many are projecting it to be.

Higher Prices Thanks to Trump

I thought I’d try to track, by category, some of the things that are going to cost you more due to actions taken by President Trump (punitive taxes on certain imports) and the retaliatory measures that are likely to be imposed by other governments. Here’s the starter list, which does not include any retaliatory tariffs*:

  • homes (lumber prices have already risen precipitously)
  • home renovation
  • any product or service purchased from a business that owns or rents a new building or office (due to higher construction and, therefore, higher capital and leasing costs)
  • autos and machinery
  • produce and other crops grown in the U.S. (due to higher machinery and fuel costs)
  • any beverage or food that comes in a can
  • washing machines, refrigerators, and other appliances
  • solar products
  • air fares (airplanes will cost more, unless airlines shift their purchases to the European producer and away from Boeing)
  • gasoline and natural gas (higher drilling and transportation costs)
  • baseball bats
  • tools
  • any other steel or aluminum-containing product
  • any other product that is transported by rail or truck (higher rail and rail car costs as well as higher truck and trailer manufacturing costs)
  • state and local taxes, which will have to be increased to pay for the higher cost of building and repairing roads and bridges (unless infrastructure is allowed to degrade further, which is a possibility)

What isn’t included in the above list are the following:

  1. If the tariffs result in a weaker dollar (as they did when George W. Bush imposed tariffs on steel), the cost of all imports will rise. Because a lot of the stuff Americans buy is imported (e.g., just about everything at Walmart), the cost of living would increase.
  2. Jobs will be gained and jobs will be lost due to these higher taxes. I have no idea what the net impact will be. Most economists say it will be negative; however, I don’t have confidence in macroeconomists and their models so I’m not about to endorse any of their opinions. We’ll know more in the months and years ahead.
  3. Trade wars can trigger recessions. If that happens, the cost to Americans will be huge (lost jobs, skyrocketing deficits, higher interest expense, etc.).
  4. Higher defense costs and the cost of wars are not included. Trade wars don’t always lead to shooting wars, but they frequently do. We’d be foolish to think it can’t happen this time; in fact, it’s prudent to assume it will. (For this and other reasons, I do think the U.S. is on a path to war.) Even if there is no war, Americans will pay more due to significantly higher costs for military equipment as well as higher logistics costs.

It’s also impossible to calculate how many of these higher costs will be absorbed by businesses versus passing them on to their customers. Certainly, due to the recent tax cuts, many corporations have room to absorb higher costs if they so choose. But that doesn’t mean it will happen, particularly since the capital markets will be expecting those costs to be recouped through higher prices. Ultimately, competitive forces will determine how much of the increased costs are absorbed and how much is passed on. The concentrated market power that exists in some sectors bodes well for companies that plan on passing the costs through to their customers.

In the final analysis, whether the higher taxes and higher cost of living are worth it is for each voter to decide for him or herself. At this point, a sufficient number of voters thought the tradeoff justified the higher costs and diminished purchasing power to elect Mr. Trump. Whether enough of them will change their minds in the days and months ahead remains to be seen. It will be interesting to observe human behavior as their living expenses rise and purchasing power declines. Whether they’ll still think the benefits (jobs saved in the protected industries) justify the costs remains to be seen.

*At the time of this posting, no country has formally announced any retaliatory tariffs; however, the E.U. informed its members that such tariffs would probably be assessed on American shirts, jeans, cosmetics, other consumer goods, motorbikes and pleasure boats; orange juice, bourbon whiskey, corn and other agricultural products; and steel and other industrial products. If they follow through on these threats, expect job losses in all of these areas in the U.S.