The Illogic of National Security Tariffs
By Dr. Harold A. Black
blackh@knoxfocus.com
haroldblackphd.com
Imports fell 16% in April, narrowing the trade deficit to $61 billion. I guess Trump is doing high-fives since he thinks that trade deficits harm national security. The problem with this thinking is similar to a person with a hammer seeing every problem as a nail. Did anyone ask, “What deficits impair national security?” Surely it is not the trade deficit on socks, belts and pantyhose. So why impose tariffs on them? But what about rare earth minerals? The problem with Trump’s tariffs is that they are universal; they apply to fabrics from Lesotho to lithium from China. Does that make sense to anyone other than Trump and his Harvard Phd advisors? It is probably too much to ask that this administration ponder lifting all tariffs and then subsidizing those items that are considered vital to national security.
Aren’t aluminum and steel vital to national security? Of course they are. But then why did Trump double the tariffs on these metals to 50%? Some specialty steel used by the U.S. military is imported. It makes no sense to raise their tariffs. Won’t that imperil national security if they are too expensive to import due to the tariffs? Trump and his people have seemingly forgotten that aluminum and steel are inputs in production as well as outputs. In his last dalliance with tariffs, when he raised them to 25% during his first term, the impact was a growth in new domestic steel employment of around 1,000 but a loss of over 75,000 jobs. This is because more workers are employed in positions that use steel as an input than those who manufacture steel as an output. Look for the same to occur this time. Taken another way, Trump’s tariffs imperil national security rather than enhance it.
What about rare earth minerals? China dominates rare earth minerals, which are indeed vital to our national security. It produces 84% of them. Why put tariffs on them? That seems to be perverse (in the economic sense). Economics says that there should be no tariffs on those items that are vital to national security. Why make them more expensive? Rather, a rational solution would be to make these imports as cheap as possible. Then, heavily subsidize industry to mine/produce them domestically. One drawback will be all the environmental rules dictating domestic production. Waive them. If we can mine lithium, cobalt and all the 17 rare earth minerals, then do it and do it regardless of the cost – if they are so vital to national security.
But no. The administration has adopted the opposite tactic, which is economically perverse. It has imposed universal and not selective tariffs. It has made the importation of vital items more expensive instead of less expensive. In so doing, it has alienated everybody, (former) friend and foe. It has actually brought our (former) allies and current enemies closer by encouraging them to trade with each other in greater volumes to make up for the loss of the American market.
Virtually all of the U.S.’s rare earth mining is at one facility in California, which produces less than four percent of the total utilized in the country. Adding to that capacity would not be cheap nor easy. It would cost billions of dollars to build the infrastructure, mining and processing facilities. It would have to overcome all the environmental obstacles and lawsuits from the greenies. Then there is the expertise. It was noted that, in the iPhone realm, the U.S. lacked the engineers necessary for iPhone production. However, China had them by the boatloads. The same is true for rare earth mineral production.
So what can be done? Subsidize. Contract with private corporations to provide what is needed to build the industry from scratch. Offer grants and aid to attract engineering majors. Pay large salaries and bonuses to existing engineers. Go out and buy the expertise. India and Australia have mining operations and engineers. Even hire the Chinese and subsidize foreign engineering students. Have the government completely finance the construction of the facilities and buy all the products at market prices. This is not going to be a task that private enterprise would undertake under almost any rational set of reasoning. So let the government do it. If it is a money loser, then so be it – if it is truly vital to national security.
The U.S. can build a domestic rare earth industry. That private enterprise has not done so is an indicator that such a task is unprofitable when all the costs and legal hurdles are considered. The obvious solution is to let the government provide the financing and private industry provide everything else.
