When “tariffs work,” they work at a cost
One story that drew attention last week was the sharp divergence between US aluminum prices and prices elsewhere in the world. The US premium passed $1 per pound for the first time ever, reflecting the higher costs US aluminum users now face relative to their foreign counterparts.
Some commentators characterized the development as a sign that tariffs are working, pointing to announcements that the US may see its first new aluminum smelting plant since 1980.
In fact, what is playing out with the new aluminum tariffs is exactly how tariffs work. Tariffs raise the price of the protected good—in this case, aluminum—thereby increasing returns in that sector relative to the rest of the economy. Investment and jobs move toward the higher return sector, an effect that is easy to see, but only because they are pulled away from unprotected sectors, where higher input costs and lower relative returns reduce profits, investment, and employment.
What “tariffs work” really means, then, is benefits for the protected sector and costs for everyone else. More often than not, this reshuffling of economic activity results in a less productive economy overall, so that once the dust settles, total economic output is lower than it would have been without the tariff.
We’ve seen this exact story play out before. During his first term, President Trump imposed metals tariffs on a smaller scale. Aluminum and aluminum derivatives then faced a 10 percent tariff, while steel and derivatives faced a 25 percent tariff, with exemptions eventually granted for major trading partners under both the Trump and Biden administrations.
A report by the United States International Trade Commission examined the effects of those tariffs and found that while they boosted prices and production for protected metals, they imposed significant costs on downstream users.
Each year on average, domestic steel production increased by 1.9 percent (about $1.5 billion) and domestic aluminum production increased by 3.6 percent (about $1.3 billion).
But that is not the full story. Across 33 industries that intensively use these metals as inputs, the USITC estimated that production fell by an average of $3.4 billion per year as a result of the tariffs.
In other words, while the tariffs boosted production for protected firms by $2.8 billion, they reduced production for downstream firms by an even larger $3.4 billion.
When economists say that tariffs are inefficient, they do not mean that tariffs cannot protect firms or redirect investment and employment toward a favored sector. They mean that doing so comes at a cost—and that the cost to the broader economy typically exceeds the benefits to the protected industry.
That tradeoff can even worsen over time, as tariffs may slow productivity growth by blunting foreign competition, reallocating economic activity to less efficient producers, and incentivizing lobbying for protection over reinvesting.
As we begin to see more stories like the aluminum one playing out, it will be worth remembering that tariffs work by reshuffling economic activity, not growing it.
Ms. Erica York,
Tax Foundation