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The hidden costs of 'America First' tariffs

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Discouraging metal imports benefits US steel producers. But it also translates into a surplus of steel in markets outside the US and thus lower prices for US competitors.

Cleveland

BILL Adler was invited last year to bid on a contract to make commercial sausage stuffers for a company that wanted to replace its Chinese supplier. The customer had just one nonnegotiable demand: Match China's price.

Mr Adler, owner of metal-parts maker Stripmatic Products, thought he could. But even as he readied his proposal, talk of President Donald Trump's steel tariffs sent the price of Stripmatic's main raw material soaring.

In April, with prices up nearly 50 per cent from October and the first wave of tariffs in place, Mr Adler's bid failed. His costs were too high.

Today, instead of taking business from China, Mr Adler worries about hanging onto the work he has. He hopes that the president's tariffs are just a negotiating tactic.

"It's got to be short-term, or I've got to find another way to make a living," Mr Adler said, only half joking. "It's going to be an ugly scenario if it doesn't end quickly." Stripmatic's plight is an example of the hidden costs of Mr Trump's "America First" protectionism. During decades of increasing globalisation, leaders of both political parties reassured critics that the gains from trade were dispersed across myriad less-expensive products - and thus often difficult to identify - while the costs were obvious every time a factory closed.

Now, as Mr Trump seeks to unwind globalisation, that logic operates in reverse. The gains from protectionism can be seen in the new solar plants and reopened steel mills that his various tariffs are encouraging and that the president often celebrates.

But the full costs of his policies - in investments foregone and workers not hired - escape casual scrutiny. If Stripmatic's experience is any guide, protectionism may already be backfiring on Americans and undermining Mr Trump's stated goal of reclaiming manufacturing from China.

"That is absolutely the lesson," said economist Phil Levy, who worked on trade policy in the George W Bush White House. "It is a supply chain. The administration has favoured the first link over the later links in the chain. The net effect helps neither American manufacturing nor national security."

Commerce Secretary Wilbur Ross has minimised the economic cost of Mr Trump's tariffs, claiming the steel and aluminium tariffs will add a "very small fraction of 1 per cent" to prices across the economy, he recently told CNBC. US Trade Representative Robert Lighthizer has said that tariffs the administration may impose on Chinese goods have been selected to minimise the impact on consumers.

But tariffs on materials used to make other products ripple through the entire economy. Mr Trump's steel levies were designed to punish China for swamping global markets with state-subsidised metals and to promote US manufacturing. From where Mr Adler sits, they appear to be doing the opposite. By raising the cost of a key manufacturing input, the tariffs are making many US companies less competitive.

Discouraging metal imports benefits US steel producers. But it also translates into a surplus of steel in markets outside the United States and thus lower prices for US competitors.

As steel prices in the United States rise, Mr Adler worries they will pinch his employees' bonuses and profit-sharing checks. The 25 per cent increase in Stripmatic's sales that he anticipated from the sausage stuffer contract, the US$1 million in new factory investment and the 10 new jobs it would have created have evaporated.

"If it wasn't for the increase that came on because of the threat of tariffs, then I honestly believe we'd be supplying these domestically," Mr Adler said of the machines that pack ground meat into sausage casings. "This directly affects my life, my employees, my investments." In a US$20 trillion economy, 10 jobs may not seem significant. But Mr Trump's frequent use of tariffs has sparked protests from farmers and industry groups that will be hurt by the administration's import levies or retaliation from US trading partners.

The cumulative cost of the president's higher import taxes will be a net loss of more than 400,000 jobs, according to a new study by the Trade Partnership, a pro-trade research consultancy.

He blames Mr Trump's trade policies for costing him the job and for imperilling Stripmatic's future, as almost one-quarter of his sales come from abroad.

"Our customers source on a global market," he said. "I'm going to be at least 30 to 40 per cent disadvantaged on steel . . . I've lost my competitive advantage." BLOOMBERG

READ MORE: Trump's trade war is mostly about politics, not economics

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