National security tariffs? Huh?

National security tariffs? Huh?

Imports fell 16 percent 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. So he applies universal tariffs on every good from every country. 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 panty hose. So why impose tariffs on them? What about rare earth minerals? Trump’s tariffs apply to fabrics from Lesotho to lithium from China. Does that make sense to anyone other than Trump and his Harvard Phd advisors? Is it too simple to ask that the administration ponder lifting all tariffs and then subsidizing those items that are considered vital to national security? What? Isn’t that opposite what Trump is doing?

Aren’t aluminum and steel vital to national security? Of course they are. But why did Trump double the tariffs on these metals to 50 percent? Some specialty steel used by the US military is only imported. It makes no sense to impose tariffs on imported steel in that there isn’t a US equivalent. Trump putting tariffs on these products simply make no sense. Won’t that imperil national security if they were not imported due to the tariffs? Trump and his people have forgotten to do a simple thing, namely realize 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 an increase 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 on steel and aluminum imperil national security rather than enhance it.

What about rare earth minerals? China dominates rare earth minerals that are indeed vital to our national security. It produces 84 percent of them. Putting tariffs on them is perverse (in the economic sense). Economics implies that there should be no tariffs on those items that are imported and vital to national security. Why make them more expensive? Why tick off the country of origin and motivate them to sell to our competitors? Rather a rational approach would be to make these imports as cheap as possible. Then heavily subsidize US 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 here in the US, 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 that is ass-backward. It has imposed universal, 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 US’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 or easy. There are obstacles strewn everywhere. 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 that the US 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. Subsidize. 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, Australia have mining operations and the engineers. Even hire the Chinese and subsidize foreign engineering students. Have the government completely finance the construction of the facilities and to buy all the product 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. As to the cost, when the fiscal budget is over $6 trillion what’s another several billion to fund an industry vital to national security?

The US can build a domestic rare earth industry. The minerals are here albeit difficult to access and difficult to mine and process. 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. The other obvious solution is to eliminate all tariffs on stuff vital to national security. But there is no indication that anyone in the administration has thought about the consequences of the “reciprocal” tariffs. That may just be a bridge too far with this administration.