The First Round of Trump´s Trade War Has Just begun

March 6 2018

Last week the White House dropped a bombshell: Trump will impose an import tariff of 25% on steel imports and 10% on aluminum imports. For how long the import tariffs will apply, remains unclear. Stock market dropped violently in reaction to the news: the news seems to have surprised investors, despite the fact that Trump on multiple occasions threatened to impose import taxes to “help the domestic industry.” Industrial and manufacturing jobs should come back to the US, according to Trump. Although gold prices (at the time of writing) barely moved on the news, an impending trade war will be bad news for the consumer but positive news for gold prices in the mid-long term.

Trump Announces Import Tax on Steel and Aluminum

The US currently imports (data from 2016) about $20 billion dollars in steel, of which $5 billion is from the European Union, $4 billion from Canada, $2 billion from Mexico and $2 billion from South Korea (source: US Census). Strikingly, the Chinese steel export to the U.S. is meaningless: just under 2% of total imports come from China. All in all, this means that Trump’s latest trade measures will cost the US industry more than $5 billion dollars.

The EU seems to react furiously. China is also expected to come with a reaction, if only because they see the storm when the US import duties on other products will begin to be introduced. Jean-Claude Juncker, President of the European Commission, condemned Trump's announced import duties. A Dutch news outlet,, cites Juncker:

"President Jean-Claude Juncker of the European Commission condemned the import duties announced by Trump. According to Juncker, the step merely serves to protect the US industry and there is no justification for national security for the step.

Juncker announced that the European Union "will react sharply" to defend its own interests. The European Commission will come up with countermeasures within two days.

I recently wrote that Trump certainly not had forgotten about his trade war (a set of protectionist measures was part of his original election promises):

Now that his tax reform has passed, one of his New Year’s resolutions seems to be the introduction of an import tax on Mexican, Chinese and Canadian products and to withdraw from trade agreements such as NAFTA. The danger, therefore, has most certainly not passed and will probably take on a more concrete form rather sooner than later in the new year. And that means bad news for the US economy and the creditworthiness of the United States.

The game seems to have kicked off.

Consumers and Investors Will Be Harmed

Of course, more expensive steel and more expensive aluminum mean more expensive final products for consumers. It also means higher costs for (domestic) companies that use and process steel and aluminum as input. This means that Trump’s import tariffs, ironically, can come at the expense of the profits of domestic manufacturing companies. The stock prices of Caterpillar and Boeing, for example, plummeted after the announcement.

In a sense, it seems ironic that Trump's attempt to save the domestic industry comes at the expense of the domestic industry. Manufacturers located in the U.S. will be forced to produce at higher costs than their peers in other countries. Everything else equal, factories will tend to move to outside the U.S. due to the cost difference. According to an Econofact report, more than 2 million jobs in the U.S. depend on the country’s larger consumers of steel and aluminum, including car manufacturers.

As Ludwig von Mises already demonstrated in his treatise, Human Action, this attempt to protect domestic steel and aluminum producers by import duties is bound to provoke further protectionist measures and import levies. The American manufacturers are, with these import duties, affected by more expensive domestic steel and aluminum, and will therefore be less competitive compared to their foreign competitors. The consequence? They, too, will lobby for privileges from Trump: because surely Trump does not want any more manufacturing jobs to disappear? There is a clear incentive to follow up on the current import duties with new, additional import duties on the products of other manufacturers. Until you end up slashing international trade in half (and an enormous impoverishment of the entire world population). And with every additional levy, the excuse will be that the "rules are not fair" (without recognizing that Trump himself is partly responsible for that).

Not only that; import duties (at the expense of foreign steel and aluminum producers) also provoke import duties from other governments on American steel and aluminum. Eye for eye and tooth for tooth, as we have already read above.

The consumers, or we, are the victims.

Dave Chapelle summed up all the above perhaps in the best possible way in one of his recent Netflix specials. Trump, says Chapelle, says things without first thinking them through: "I'm going to China, and then I'm going to take those jobs back from China, and I will bring them back to the U.S." Chapelle responds in his typical style: “For what, n***? So iPhones can be $9,000 dollars? Leave those jobs in China; we want to wear Nikes, not make them.”

The Parallels with the Global Trade War of the Great Depression

The idea of ​​a trade war should remind us of the Great Depression of the 1930s. Sure, we had a recession. Sure, many banks went bankrupt. Sure, the stock market collapsed. But what really turned the Great Depression into a depression with capital D was the Smoot-Hawley Tariff Act from 1930.

The Smoot-Hawley Tariff Act was the absolute climax of a series of import duties that were imposed back and forth between mainly the U.S. and European countries. The scope of Smoot-Hawley was immense: import duties were imposed on more than 20,000 imported goods. The consequences were frightening:

Source: Charles P. Kindleberger, "The World in Depression 1929-1933"

Global trade declined 2/3 over a period of barely four years. While global trade still amounted to approximately $3 billion (gold-backed) dollars in 1929, by 1931 the volume of global trade had already halved. In 1933, only a fraction of global trade was left. And the enormous destruction of wealth that came with it was extremely visible in both the United States and Europe.

Now, if the Great Depression is any indicator of what still awaits us, then Trump’s actions do not bode well. Like last time, the U.S. the instigator. The main difference is, however, that at the time the dollar was still backed by gold (until President Roosevelt eradicated gold and devalued the dollar); now it is up to you to have gold and to insure yourself against a repetition of "Smoot-Hawley". Last week, Trump has taken a clear first step.


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