Trump’s copper tariff: Twisted logic won’t help re-industrialize America

Trump noted that copper “is necessary for Semiconductors, Aircraft, Ships, Ammunition, Data Centers, Lithium-ion Batteries, Radar Systems, Missile Defense Systems, and even, Hypersonic Weapons, of which we are building many."

So why would you then want to raise taxes on copper? Increasing the price Americans pay for copper makes the US a less desirable location for building aircraft, ceding advantage to competing producers in Europe, Brazil and Canada. It makes it harder to establish a domestic semiconductor manufacturing industry. It exacerbates the already dire state of the US shipbuilding industry, which is wholly reliant on protectionist policies.

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The strategic value of copper might be a basis for protectionism if the US were getting its copper from hostile or unstable countries. But copper is not a rare earth mineral for which the US must rely on Chinese suppliers, nor is it like oil in the pre-fracking era, when the US had to import it from questionable regimes in the Middle East. The majority of US copper imports come from Chile, and the next two major suppliers are Canada and Peru.

Meanwhile, America also has a robust domestic copper industry, which accounts for about half the copper used in the US. The majority of this copper comes from the swing state of Arizona, which may offer a narrow partisan rationale for copper protectionism. But there is no strategic problem with importing copper from friendly countries in the Western Hemisphere— and every reason to worry that deliberately raising the price of a widely used production input will hamper US competitiveness in crucial industries.

This is, unfortunately, not an unusual consequence of Trump’s trade policy: By applying taxes on intermediate goods, he is encouraging the US to specialize in resource extraction and primary commodities at the expense of complicated manufactured goods.

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‘Industrial policy’ functions by moving a nation’s economy up the value chain. In the early days of the American Republic, for example, Alexander Hamilton worried that the US would continue to be a de facto economic colony of Europe. As a sparsely populated nation with abundant natural resources, a totally unregulated market might have caused America to specialize in exporting raw materials to Europe, which would in turn export manufactured goods back to America. As an alternative, he proposed protective tariffs to promote the growth of US industry.

Trump borrows his own tariffs from the Hamiltonian tradition, but completely misses the larger logic of the programme and the altered nature of the modern economy. Over time, as the world has become richer and shipping has become cheaper, the cutting edge of manufacturing has become increasingly complicated. These days it’s common to assemble a finished product from parts made in countries all around the world, with each part itself containing a staggering array of raw materials.

Countries get richer by specializing at the more complex end of the spectrum. To the extent that you can boost US natural-resource production by eliminating low-benefit regulatory barriers, that’s a win. But boosting the US copper-extraction industry at the expense of US copper-using industries is a recipe for de-industrialization. And much the same applies to Trump’s obsession with protectionism for industries like steel and aluminium. For the US to be a manufacturing powerhouse, its industries need access to the cheapest possible inputs.

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It’s also worth considering that even though 19th-century pro-industrialization politicians favoured tariffs, Trump is likely overrating their importance in promoting the growth of factories. One important manufacturing input, after all, is workers. 

The kind of quasi-open borders of the Gilded Age would probably not be a major boost to US manufacturing today. But a serious industrial policy would consider the case for a visa programme for skilled workers with experience in fields such as semiconductors, batteries and shipbuilding. At a minimum, the goal should be to avoid actions that make things worse.

Copper is important because it’s used to make other stuff. The goal of US trade policy, not to say industrial policy, should be to help America become a better place to make stuff that the world wants. Trump’s nostalgia economics is pushing the US further from that goal.  ©Bloomberg

The author is a columnist for Bloomberg Opinion.