The promise of protectionism
An investigation of the effects of Donald Trump’s import tariffs on steel
and aluminum
Master thesis Political Science
Specialization: Political EconomyAuthor: Daphne Kortbeek Student ID: 10591826 Supervisor: Dr. S. Krapohl Word count: 23236
Table of content
Table of content 1 Abbreviations 3 Introduction 4 Literature review 6 Theoretical framework 8Part I: Trade theory 8
Part II: History of trade and protectionism in the US 10
US protectionism in history 12
Trade and the decline of the manufacturing industry 13
Trump’s protectionist economic policy and his expectations 14
Part III: Tariffs 14
Effects of tariffs in general 15
Micro effects of a tariff imposed by the United States 15
Macro effects of a tariff imposed by the United States 16
Effects of tariffs in specific: the tariff on steel and aluminum imposed by the US 17
Domestic producers of steel and aluminum (primary production) 17
Domestic producers in downstream industries 18
Domestic consumers 20
Retaliatory tariffs 20
Hypotheses 22
Research design 23
Case selection 24
Dependent and independent variable 26
Empirical analysis 28
Part I: Overview economic situation US & trade war 28
Economic situation in the US: general trends over time 28
Trade war overview 32
Part II: Federal level analysis 35
Steel and aluminum producers 35
Producers in downstream industries 39
Consumers 43
Part III: State level analysis 45
Employment 46
Wages 48
Average weekly hours worked 48
Findings 49
Ohio 52
Employment 53
Wages 54
Average weekly hours worked 55
Findings 56
Michigan 59
Employment 60
Wages 61
Average weekly hours worked 62
Findings 63
Wisconsin 65
Employment 65
Wages 66
Average weekly hours worked 66
Findings 67
Discussion 69
Conclusion 72
Bibliography 74
Appendix I 83
Abbreviations
CPI Consumer Price Index
GDP Gross Domestic Product
IPE International Political Economy
IR International Relations
OECD Organization for Economic Co-operation and Development
PPI Producer Price Index
UN United Nations
US United States
VER Voluntary Export Restraint
Introduction
“Protectionism is back”, is the opening line of an article from The Economist about free trade in March 2018 (The Economist, 2018). It is a signal that the liberal world is changing, the foundations of it are being questioned and put under pressure. The biggest changes are going on since the last three years. Two major events have caused this change for a big part, the vote of Great-Britain to leave the European Union (Brexit) and the election of Donald Trump as president of the United States (US). After a long period of liberalization, with a focus on free trade and cooperation, protectionism is getting a foothold in the Western world again (Idem). The attractiveness of protectionism for voters is a mystery for many economists. Globalization and liberalization is known to deliver welfare gains overall, but there will be some people who lose because of it as well, and more importantly, the gains and losses are not always equally divided. This is one of the reasons that is often mentioned when one tries to explain the rise of protectionism (Davies, 2016). This would automatically lead to the conclusion that the so called ‘losers of globalization’ are the voters who find protectionism attractive. However, it remains unclear whether protectionist policies do actually benefit the people who lose from globalization. The general idea is that protectionism causes losses instead of gains for the whole (Stiglitz, 2018), but it might deliver some gains for specific groups in society.
Trump presented himself as a man of the people in his presidential campaign and his ‘America First’ policy ideas would make America great again. He was very critical towards globalization and he stated that he would make sure lost jobs would come back to the US. He promised to protect US citizens from harming trade agreements, climate agreements and the influx of immigrants (Sides et al., 2017: 39-41). These promises payed off, because on the 20th of January 2017 he became the 45th president of the United States of America (Idem). The US government is specifically targeting the manufacturing industry with its protectionist measures, an industry that is mostly relevant in multiple swing states (Davies, 2016). The manufacturing industry is one of the industries in which many people lost their jobs over the past 25 years, due to globalization (Idem). This means this thesis will explore the idea of whether the losers of globalization in the US are the winners of protectionism. Therefore, in this thesis I will look at Trump’s protectionist economic policy to see whether people in swing states in which manufacturing jobs were lost are now benefiting from his policies.
The research question that follows from this empirical puzzle is: How do Trump’s import tariffs on steel and aluminum directly affect the economic situation of voters in swing states in the United States? Therefore, the independent variable, the X variable is the tariffs on aluminum and steel. The dependent variable, the Y variable, in this research is the economic situation of voters in the swing states that are identified above. Y would exist of variables such as the amount of jobs, the
hourly wage, the Consumer Price Index (CPI) and real GDP. In this thesis I will look at the effects of X on Y.
This thesis builds upon research that has been done in the past. Many scholars have examined the effects of tariffs in different contexts (Slopek, 2018; Anderson & Neary, 1992; Hertel & Keeney, 2006). This provides knowledge about the possible effects of tariffs. Secondly, scholars have examined tariffs on steel in the United States in the past, but economic circumstances and production techniques change over time so the results from the past might differ quite a lot from the results at this moment in time (Francois & Baughman, 2003). Some research has been done into the policies of the Trump administration. Yet, little studies have been done into the effects of the tariffs on steel and aluminum in specific. More importantly, not one study has been done into the effects of these tariffs on swing states in particular; the effects have only been predicted so far. Therefore, in terms of academic relevance, this thesis can add insights about the effects of the tariffs on aluminum and steel on the state level. Outcomes of this study can be used to analyze whether the policies from the Trump administration fulfill the campaign promises that have been made. In terms of societal relevance, this thesis will make a contribution because it looks into the real effects of tariffs for people in swing states. The results of this thesis could be used by individuals or companies to indicate their benefits or losses due to the import tariffs. It could also shed more light on the effects on the micro level. This might lead to a better understanding of the working of these tariffs.
Literature review
This thesis touches upon one of the largest debates in International Relations (IR), namely the debate about the theoretical explanatory power of realism and liberalism, the two most famous IR theories. In an ever more globalizing world in which interdependence between countries increases, liberalism has been seen by most scholars as the dominant IR theory explaining state’s preferences. The core concepts in liberalism are “free trade, multilateralism, collective security, democratic community, progressive change, shared sovereignty and the rule of law (Ikenberry, 2010: 512-513)”. The assumption is that states will pursue cooperation through international institutions and that economic growth will lead to international economic ties which create interdependence (Duedney & Ikenberry, 2018: 18). In the basis, states will strive to obtain absolute gains and this is the reason why they will cooperate (Powell, 1991: 1303). In contrast to this liberal view of state’s preferences, realists think that states strive to obtain relative gains, to gain relative power, which makes conflict more likely (Idem). According to realism, states are constantly trying to increase their capabilities (Griffiths, 2007: 12). The election of Donald Trump triggered academics to do research into the explanatory power of realism and liberalism regarding the United States’ foreign policy. Some state that Donald Trump can be seen as a realist, who tries to increase the relative power of the United States compared to other countries in the world and who undermines the US-led liberal world order. Studies into his foreign policy show that his behavior is damaging the liberal world order as it is (Irwin, 2017; Stiglitz, 2018). His ‘America First’ policy is causing a destabilization of international institutions such as the NATO, the World Trade Organization (WTO), the United Nations (UN) and the withdrawal of the US from TPP and the international climate agreement are signals that Trump wants the United States to make a turn inwards (Salvatore, 2018: 487). However, not all scholars agree that Trump is unique in applying some realist policies. Thus, the debate in IR about realism and liberalism is an ongoing affair and Trump’s election and his policies are breathing new life into this debate.
If we zoom in on the field of International Political Economy (IPE), this thesis is strongly related to the debate about trade between two schools of thought: neo-mercantilism and neoliberalism. Scholars from the first camp see trade as a zero-sum game, which will likely enhance conflict, while scholars from the second camp see trade as a win-win situation which will likely enhance peace and prosperity (Cozzolino, 2018: 48). Some would argue that the economic policy of the Trump administration shows the start of a new mercantilist era. It clearly shows distrust in the positive role of international trade, and aims to bring jobs back to the country which ‘were stolen’ by other countries (The Economist, 2018). The debate between these schools of thought is not new, but it became relevant again because of developments such as the election of Donald Trump. In the mercantilist school of thought, the state is seen as the main actor in the international system. The main goal of the state is to increase its wealth and power. Economic nationalists argue that if one state increases its
relative power and wealth, the relative power and wealth of another state has necessarily decreased. As in the realist school of thought in IR, the gains that are central here are relative. Self-sufficiency is the main goal of each state and therefore industry is crucial (Cozzolino, 2018: 54). Industry leads to economic growth and therefore to power for the state. Therefore, economic strategies to protect domestic industries from foreign competition are useful according to the neo-mercantilist school of thought (Gilpin, 1987: 33). In the neoliberal school of thought, the gains are absolute. Trade is seen as something that can enlarge the whole economic pie, instead of only changing the way this pie is divided between actors. Historically, the center of this school of thought has always been the market instead of the state. Crucial is the limited role and power of the state and the power of the free market forces (Stahl, 2018: 473). From the perspective of a neoliberalist, trade is something which is good for the economy. All countries will benefit from trade, but some people within countries will be better off than others (Blinder, 2019: 123). Trade has been seen as a key factor in the increase in living standards around the world for the last decades. Before the financial crisis, integration of many (emerging) economies into global trade, mainly due to the emergence of global value chains, has lifted millions of people out of poverty (Coeure, 2018). After the financial crisis, there have been some years in which the contribution of trade to economic growth was not so big, but this has changed quickly and nowadays, trade is a major contributor to higher living standards again (Idem).
Yet, there are signals that the trust in the role and importance of trade has declined and that globalization is not seen any longer as the path to economic growth for all countries. An anti-globalization sentiment has got a foothold in the liberal world, despite of the benefits anti-globalization brings to the people. This sentiment is being expressed by voters all over the world, examples are the Brexit vote, the elections in Hungary and Poland and the election of Donald Trump in the United States (Rodrik, 2018: 13). The election of Trump was considered to be ‘a shock’ for many scholars (Peterson, 2018: 28). Therefore, studies into the reasons behind his election have been conducted.
The focus of academic research into the phenomenon ‘Trump’ has been mainly on identifying the ‘Trump voter’, his presidential campaign, authoritarianism and his extraordinary twitter behavior (Fuchs, 2018; Fortunato et al., 2018; Swedberg, 2018). Relatively little studies has been done with the focus on the possible consequences on his policies. Even though economists agree that protectionism is not the solution to the problems globalization causes, Donald Trump does implement protectionist economic policies (Stiglitz, 2018: 520). “According to many economists, Trump’s knowledge of basic economic facts and principles is severely deficient. Joseph Stiglitz has said that he would give Trump an F in Economics; Larry Summers has called him a protectionist demagogue; and according to Krugman, there is nobody home (Swedberg, 2018: 13).” It remains unclear what the exact effects of his economic policies are and therefore this thesis will look at the effects of the protectionist economic policies of the Trump administration on voters in swing states. It might be the case that protectionism is not good for the ‘whole’, but that it is for specific groups of people in swing states.
Theoretical framework
The implementation of protectionist economic policies by the 45th President of the US is bringing back the discussion about the benefits and costs of free trade and protectionism. An outward oriented growth strategy can bring considerable economic benefits, because this strategy will enhance productivity, which is seen as the engine of long-term economic growth by most scholars (Haddad & Shepherd, 2011: 6). However, according to the current US government, trade can also harm important domestic industries in such a way that it threatens national security. This is exactly the ground on which President Trump imposed import tariffs on steel and aluminum (Thrush, 2018). This theoretical framework will consists of three core parts. Part I will explore important trade theories, part II will provide the reader with knowledge about the history of trade, protectionism and the decline of the manufacturing industry in the US to get a better understanding of what is at play before moving on to part III about tariffs and their potential impacts on the micro and macro level according to theory.
Part I: Trade theory
One of the oldest theories about trade is the theory of comparative advantage by Ricardo (1817). In this theory, Ricardo pointed out that trade is not so much about absolute advantages in productivity, but about relative advantages. This means that countries will specialize in the good which they produce the most productively, even if other countries are in absolute terms more productive in producing all products. Each country will therefore export the product which they can produce the best (OECD, 2011: 28). The basic Ricardian model implies that both countries gain from trade. The possible gains from trade can be split into two categories, static gains and dynamic gains. The static gains result in a one-off increase in welfare, due to the change in prices. This might be positive at that particular moment, but it does not have a large effect on a country’s economic development over time. However, there are dynamic gains from trade that can be identified as well. These dynamic gains include an increase in productivity, due to a decrease in trade costs or more competition, which leads to more innovative attitudes of firms. Imports can also be a vehicle of technological transfer and therefore contribute to innovation and enhanced productivity (Idem: 236). However, both countries do not always benefit from trade, because trade distorting policies can be put in place.
The concept ‘comparative advantage’ can be measured in different ways. In the basic Ricardian model it is based on differences in technology, while it can also be related to differences in relative factor endowments or differences in institutions. Measuring comparative advantage is not easy, the best estimation can be made in a situation of autarky, which is not a realistic option because
most countries have been trading for a long time (OECD, 2011: 31). A possible way of measuring comparative advantage is to look at the factor content of trade. This means identifying the factor of production that a country has in abundance (Idem: 34). This measure is being used to identify comparative advantage in the Heckscher-Ohlin model of trade and in the Stolper-Samuelson model (Jeong, 2009: 521). It is crucial to think of factor mobility when thinking of factor abundance. The Stolper-Samuelson model assumes that factor mobility is high and that the owners of the abundant factors of production prefer international free trade. In the United States, capital and land are the abundant production factors and owners of these factors of production are in favour of free trade because of their comparative advantage in trade. Labour is therefore expected to be in favour of protectionist policies (Jeong, 2009: 521). According to the Ricardo-Viner model, interindustry factor mobility is low and therefore not all workers are in favour of protectionist policies. Owners of the same factors of production might have different preferences regarding trade policy because of the costs of moving their factor of production. Some workers might be in favour of free trade, while this is going against the logic of comparative advantage from the perspective of the Stolper-Samuelson model (Idem).
Regarding the effects of globalization, in the last decades, developed economies have been losing their revealed comparative advantage in unskilled-labour intensive products progressively. Countries such as India and China have been expanding their comparative advantage in this type of products. This means that globalization leads to structural adjustment in developed countries which is felt mostly by unskilled workers (OECD, 2011: 105). This argument is in line with the mobility of factors of production, technology and human capital are quite mobile, while unskilled labour is not. This can be seen as part of the explanation why some people in advanced economies feel ‘left behind’. The models above are considering trade in a situation of perfect competition and around the 1970’s this was no longer considered to be a realistic assumption. Therefore, a new theory based on imperfect competition was needed. Instead of looking at the comparative advantage or factor endowments to understand why trade exists, it is possible to think about trade in terms of imperfect competition and increasing returns. This is the basis of the ‘new trade theory’ (Yamarik, 2018: 252). The ‘old’ trade theory could explain trade patterns only partially. European countries are a good example for this, because they trade a lot with each other while a lot of them would have the same factors of production in abundance. These countries have the same resources and sometimes also the same climate, which can not easily be explained by the Heckscher-Ohlin theory. This is where economies of scale come in; it is more productive when one country produces a lot of one product, while another country specializes in another product (Krugman, 1979: 479). “In the Krugman trade model, when two monopolistic competitive economies are allowed to trade, increasing returns produce trade and gains from trade even if the economies have identical tastes, technologies, and factor endowments (Zhang, 2008: 61).” Firms that are early entrants in the market and able to drive down their costs first, can
become the dominant producers for that particular product. Competition is imperfect, because it is limited and not just based on the price. Competition is also based on differences in products, such as its quality and brand. This is a reason for intra-industry trade (Krugman, 1979: 470). The element of the theory that states that early entrants can become dominant players in the market make that there is a role for government policy. With certain policies and under the right circumstances, governments can try to make companies in their country more advantaged so that those companies become the dominant players (Krugman, 1987: 134). Governments can use policy as a ‘strategic move’, similar to investment in excess capacity or in research for innovation. This is also called ‘strategic trade policy (Idem: 135).
“In particular, when there is a significant domestic market for a good, protection of this market raises the profits of the domestic firm and lowers the profits of the foreign firm in the case where both enter; like an export subsidy, this can deter foreign entry and allow the domestic firm to capture the excess returns. As business-men have always said, and as economists have usually denied, a protected domestic market can—under some circumstances!—promote rather than discourage exports, and possibly raise national income (Idem: 136).”
This new understanding of trade patterns gave rise to more enthusiasm about government’s interventions in the economy and forms of protectionism. However, even though there may be positive outcomes from these protectionist interventions, critics have immediately raised some concerns as well. Some authors, such as Rodrik (2009) state that there are two fundamental problems that might occur. The first one is the incapability of the government to identify the winners. This means that the government has to be able to identify the industries that will have the comparative advantage in the future, if they get some help. This is a difficult process that acquires substantive knowledge from government officials. Secondly, these kinds of policies might trigger rent-seeking behaviour which leads to losses (Idem: 84).
Part II: History of trade and protectionism in the US
Historically speaking, the United States has played a major role in the liberalization of trade. From the 1930s, the US acknowledged that it would be in its national interest to create a US-led trade regime based on rules. It is seen as the leader of the international liberal order for a long period of time. In 2017, the US was the largest trading nation in the world, with exports of goods and services worth 2.35 trillion dollar (USTR, 2018). The United States has a trade deficit, which means it imports more than it exports. When we look at trade openness, which can be described as trade as a percentage of GDP, the trade openness of the USA increased from around 9% to around 27% of GDP (World Bank, 2017).
Graph 1. Trade as a percentage of GDP (USA) (Data source: World Bank. (2017) Trade (% of GDP). World
Bank Data. Available at: https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=US (consulted on April 12th 2019).)
Referring back to the comparative advantage, if one takes the Heckscher-Ohlin-Vanek model of international trade as guideline, the factor abundance is what matters to determine the comparative advantage. The whole OECD area is capital abundant, the United States even has the largest capital stocks together with Japan (OECD, 2011: 153). The United States can be described as a country that is capital and land abundant. Therefore, it would be expected that the US has a comparative advantage in services and capital goods, because those are sectors that produce capital-intensive goods in contrast to labour-intensive goods, which can be produced for a cheaper price by a country which is labour abundant.
If we look at the trade balance of the US, it has a trade deficit in terms of goods. It imports more goods than it exports. Looking at what goods the United States exports mostly, we see that the biggest share of exports consists of manufactured goods. This category consists for a large part of petroleum oils (other than crude), motor cars for transports of persons, part of motor vehicles, electronic integrated circuits and radio-telephony transmission tools (World Bank, 2018). The top of imported products consists of motor cars for transport of persons, petroleum oils (crude), radio-telephony transmission tools, automatic data-processing machines and parts for motor vehicles (Idem). This short analysis shows that there is a lot of two-way trade in the US, they import and export the same categories of products. However, this does not mean the products are exactly the
same. There can be a difference in quality or the taste of consumers is different. It can also be a difference in whether a product is an end-good or not. In terms of trade in services, the US has a trade surplus, they export more than they import. This surplus corrects the overall trade balance, but it remains in deficit because the trade deficit in goods is much larger than the trade surplus in services (McBride & Chatzky, 2019). Additionally, the share of the US in total world exports is much larger in services than in goods (World Bank, 2018).
US protectionism in history
Even though the US is seen as a leader of the liberal world, there have been some moments in history in which protectionist policies were implemented in the United States, such as in the mercantilist era in the end of the 19th century. At that time, congress was making protectionist policies to protect industries and US labour. Later, in the 1930s, the Smoot-Hawley tariffs came in place. However, due to their ineffectiveness, the United States government declared that it could no longer help non-competitive industries with tariffs (Borrus & Goldstein, 1987: 336-337). Despite the lessons that were learned in the Great Depression, the US did experience a third period of protectionism in the 60s. This time, it was not in the form of tariffs, but in the form of structural adjustment aid programs for industries (Idem: 338). Besides waves of protectionism, there have always been some protectionist measures in place to protect different domestic industries over time. Under the Reagan administration, the automobile industry sought assistance and asked the President to protect the domestic industry in line with Section 201 (Dhar, 1992: 146). However, Reagan did not sign the bill with import restrictions for Japanese cars, but used it as leverage to negotiate. Later, the US and Japan agreed on Voluntary Export Restraints (VERs) instead. Also, protection of the steel industry is not something new. The steel industry is historically an important industry for reelection which causes presidents to implement protectionist measures for this industry, removing it when there are complaints from consumers and implementing it again to get reelected (Tansey et al., 2005: 1097). Under the Bush administration, tariffs of 30% on steel have been put in place (Bergsten, 2002: 86). Additionally, the agricultural sector is subject of protectionist measures under different administrations. G.W. Bush implemented bills that subsidize American farmers in 2002, just like Hoover and G.H.W. Bush did in the 30’s and the 90’s (Idem).
Regardless of the protectionist measures the US has taken in history, the overall idea of the US as a liberal world power in favour of free trade was consistent until the election of Donald Trump. Usually, trade issues are not subject of intense debate during election time. However, this was completely different at the previous presidential elections. Donald Trump makes trade a hot topic, he did this during his presidential campaign and he still does this during his presidency at the moment. In line with his slogan “America First” the economic policy of the US is becoming more protectionist
(The Economist, 2018b). Three economic policies of the Trump administration can be seen as protectionist: the import tariffs on steel and aluminum, the withdrawal from TPP and the renegotiation of NAFTA. The import tariffs on steel and aluminum is the protectionist policy that will be focused on in this thesis, because it is targeting industries in important swing states and it has visible direct effects that can be measured today. Because these tariffs are aimed at protecting industries which were harmed by globalization, it is interesting to examine whether they are profiting from protectionist measures. The withdrawal from TPP has effects as well, but the effect takes the form of a shift of power towards China and the direct economic effects for swing states are hard to measure (Dian, 2017).
Trade and the decline of the manufacturing industry
Over time, the world has become more and more globalized. The US has lowered its tariffs on all goods substantially, together with many other states (The World Bank, 2019). For the manufacturing industry this development had influential consequences. Steel producers for example had a hard time during the Asian financial crisis in the late nineties because Asian countries were importing their steel into the US for extremely cheap prices. Also, the signing of the NAFTA agreement with Mexico and Canada led to decline in wages for workers in the manufacturing industry in the US between 1990 and 2000 (Fort et al., 2018: 52). The problems for the whole manufacturing industry in the US became bigger in 2001, when China was allowed to enter the WTO. During 2000 and 2007, manufacturing industry employment decreased by 18% and this can be linked to the admission of China to the WTO (Pierce & Schott, 2016: 1632). Even though the admission of China to the WTO did not lead to much lower tariffs from the US, because they were already quite low, it did lead to certainty, which is crucial for business. Because uncertainty was reduced, Chinese producers were more willing to expand to the US market, US producers were more willing to outsource parts of their production to China or to invest in technologies to make the production process less labour abundant and more in line with the US comparative advantage (Idem: 1633). Therefore, one could argue that the decline of US manufacturing industry employment is for one part caused by technological innovation and for another part by globalization. Also, these processes can accelerate each other. The process of globalization can lead to an incentive for US producers to invest more in technological innovation, which will both lead to a decline in employment (Fort et al., 2018: 49). The decline of the manufacturing sector in the US has been a concern for the US government for a long time and several policies have been adopted to protect the manufacturing industry (Levinson, 2018: 1). The development of the manufacturing industry in the past should be taken into consideration when looking at the effects of the tariffs.
Trump’s protectionist economic policy and his expectations
On the first of March 2018, Trump announced that the US will put import tariffs in place on steel (25%) and aluminum (10%) coming from most countries, including China. On the first of June, this was expanded to the European Union, Canada and Mexico (US Customs and Border Protection, 2018). This marked the start of a trade war and other countries came with retaliatory measures, especially China. Some other products like solar panels and washing machines were subject of protectionist measures as well, while soybeans (the biggest agricultural export product) were amongst the products that were used as retaliatory measures (World Bank, 2018). The President claims these tariffs are a legal form of protection under Section 232 of the Trade Expansion Act of 1962. This section allows for an investigation into the effect of imports on national security. This investigation focuses on whether the import of a certain article is in such quantities or under such circumstances that it threatens national security (Bureau of Industry and Security, 2016). According to the Trump administration this is the case for steel and aluminum and therefore it is allowed to put tariffs on these imports. “The reports found that the excessive level of imports threatened to impair the national security because further closures of domestic production capacity would result in a situation where the United States would be unable to meet demand for national defense and critical infrastructure in a national emergency (The White House, 2018).” According to President Trump, this tariff will help to bring jobs back to the United States that were lost, due to unfair and bad trade deals (CNN, 2018). It will lead to a more equal level playing field, an expansion of steel and aluminum companies and it will help to recreate vibrant steel and aluminum companies.
Looking at this from an International Relations (IR) perspective, it is reasonable to argue that Trump is a realist who sees trade as a zero sum game (Schweller 2018: 134). According to him, trade is making other countries win, while the US loses, relatively speaking. The expectations of the Trump administration regarding the tariffs on steel and aluminum can be summarized as following: putting tariffs on aluminum and steel will lead to more jobs in the United States. Secondly, it will lead to an expansion of steel and aluminum companies and therefore to a regrowth of the industry. Thirdly, it will lead to a reduction of the trade deficit, which is bad according to the Trump administration (Navarro, 2018).
Part III: Tariffs
Import tariffs should be explained as taxes levied on imports. Governments usually use this measure for income distribution. An import tariff can protect and promote industries that are considered to be crucial for the country’s economy (Krugman et al., 2015: 156). A theoretical exploration of the possible effects of tariffs will follow.
Effects of tariffs in general
Tariffs might not be meant to alter the country’s terms of trade, but it does affect it. A specific feature from a tariff is that it creates a gap between the price for the same product abroad and in the home market. An imported product becomes more expensive in the home market than it is abroad. When a country is a big, and thus important, importer of a certain product, the price changes caused by the tariff will change relative supply and demand on world markets. This will result in a change in the terms of trade (Idem). In general, the rise of the price of the good on which a tariff is imposed will result in lower demand for foreign goods. This means that there will be less imported of that good than before the tariff. This is beneficial for producers in the importing country, but harming consumers in that country. It is also harming producers that use imports as inputs for the product they produce. In foreign countries, consumers will gain from lower prices due to a lower demand for the product, but producers lose due to higher costs and lower prices (Idem: 236). Additionally, the government imposing the tariff gains revenue. Therefore, it is reasonably to argue that there are always winners and losers when a tariff is being imposed. Accordingly, the cost-benefit evaluation of a tariff also depends on the value of a dollar to the group that is hurt by the tariff and on how the government uses the revenue collected from the tariff (Idem: 238). However, this is something that is not taken into account by many analysts when calculating the welfare effects of a tariff. The loss of a tariff can be described as an ‘efficiency loss’ following from the distortion of incentives to consume and produce, while the gain can be described as a ‘terms of trade gain’. This arises due to the lower foreign export price that the tariff causes. This gain can only be obtained by large economies, like the United States for example (Idem).
Micro effects of a tariff imposed by the United States
Following the logic of the comparative advantage and factor abundance outlined earlier in this theoretical framework, the expectations that will be formulated in this part will substantially differ from the expectations of the Trump administration. Looking at the measure the US government is using, it is clear that the government is protecting US steel and aluminum producing companies. This is a crucial point, because the effect of the measure is completely different on the steel and aluminum producing industry than on the steel and aluminum consuming industries. The consuming industries are for example the auto industry, the washing machine industry, cutlery makers and producers of railway cars; furniture manufacturers and pickled vegetable canners; tire makers and wire makers (Porter & Gates, 2018). Effects for the steel and aluminum producing industry will most likely be positive, while effects for the steel and aluminum consuming industries will be negative due to an increase in prices of aluminum and steel. Imported aluminum and steel will become more expensive due to the tariff, therefore, it is likely that imports will decrease and the steel and aluminum production will expand in the US. This can be seen as a positive development, but at what cost?
Evidence from the past shows that import tariffs on steel imposed by President Bush in 2002 had such a negative effect on the steel using industries that more jobs were lost there than there are in the steel producing industry in total (Francois & Baughman, 2003: 1). This indicates the relative importance of steel using industries compared to steel producing industries in the United States.
Thus, on the state-level, import tariffs are likely to affect amongst other things, firms’ profits, employment, wages and prices. In general, tariffs are expected to increase prices for consumers, which is an economic loss, and to shift profits from foreign producers to domestic producers, which can be seen as an economic win (Ervik & Soegaard, 2014: 13). What is important to take in mind, is that we are not just speaking about the effects of protectionism, but about the effects of protectionism after a period of liberalization (Irwin, 2017: 47). If a country has never been really open to trade, local companies are not likely to have international supply chains. But in the case of the US, which has been relatively open to trade for a long time, companies have outsourced parts of their production, which mean they might have international supply chains. A consequence of these supply chains is that import tariffs can be very disruptive for domestic firms because their inputs become more expensive (Cerutti et al., 2019). At the local level, making changes to supply chains is costly and time consuming. So producers have to choose whether they leave their supply chain as it is, and accept the higher costs, or to change towards a different supplier which is less productive than the previous one. Prices for consumers will also rise due to these kinds of developments, because the cost price of products increases.
Macro effects of a tariff imposed by the United States
On the macro level, there can be some effects for a country’s currency. If we specify this for the United States, the value of the US dollar is likely to be affected by a substantial tariff. When the demand for foreign goods falls due to tariffs, US demand for foreign currencies will also decrease, putting upward pressure on the relative exchange value of the US Dollar (Congressional Research Service, 2019: 26). This will lead to a decrease in demand for exports from the United States and an increase in demand for foreign imports, which will create opposite effects as the initial tariff. Imposing a substantial tariff might also result in a shift in national consumption patterns. The tariff causes domestic producers and consumers to shift towards more expensive domestic substitutes and this will somehow have an effect on aggregate demand (Idem). Regarding its effects on the US labour market, it will probably cause movements of workers between industries because of the tight labour market. However, it is likely to create new jobs and a loss of jobs in specific industries. Also, the unpredictability of the actions of Donald Trump causes insecurity which may put a drag on US and global economic activity (Idem: 11). Additionally, on a more systemic level, this sudden policy change of the United States might affect its international role in the negotiations of Free Trade Agreements in the long term. Overall, economists argue that a reallocation due to a price distortion, which a tariff is, reduces efficiency and productivity over the long run (Idem: 27).
Effects of tariffs in specific: the tariff on steel and aluminum imposed by the US
The effects of tariffs in general have been discussed in the previous section and this section will continue with the possible effects of the tariffs on steel and aluminum in specific. This means the effects for domestic producers and consumers will be discussed.
Domestic producers of steel and aluminum (primary production)
A tariff on steel and aluminum causes a rise in prices of imported steel and aluminum, but also of domestically produced steel and aluminum. This is the case because if foreign steel and aluminum will get around 25% more expensive, domestic producers could raise their prices for example with 24% and still produce cheaper steel, so they would still have the competitive advantage (Mullins & Chrisman, 2018). So, it is likely that the price of domestic steel and aluminum will increase between 0 and 10/25% for respectively aluminum and steel. The increase in prices will change the competitiveness of US steel and aluminum producers in regard to foreign steel and aluminum producers. It will give an advantage to the US producers in the US market. Therefore, it is likely that steel and aluminum imports will decrease; a shift towards domestic production can be expected due to price differences (United States International Trade Commission, 2003b). The demand for steel is not likely to decrease immediately, because of planned projects and little options for substitution. Aluminum is a substitute for steel, but this product also faces a tariff. For aluminum, a good substitute would be copper, in terms of material (Aluminium Insider, 2016). However, because copper prices are usually much higher than aluminum prices, it is not very likely that business will substitute aluminum for copper quickly (Idem).
In the short run, the increase in prices that can be expected will create opportunities for steel and aluminum producers, also because there will be more demand for US steel and aluminum than before the tariff. These opportunities include the expansion of their firms, hiring more workers and more investment. If this is the causal mechanism that can be seen on the ground, the tariff is likely to have positive effects for a state’s economic situation. Thus, the tariffs imposed by the US government are most likely beneficial to domestic steel and aluminum producers. The causal mechanism between the tariff and economic situation in swing states exists of different elements. One of these elements is the effect of the tariff on steel and aluminum producers which will affect the economic situation in swing states. This causal mechanism is visualized underneath:
Figure 1. Causal mechanism steel and aluminum producers
The steps in this causal mechanism will be checked to make links with the local level effect of the tariff on steel and aluminum later in this thesis. This causal mechanism is only one part of this analysis, because it shows the effects the tariff has on domestic steel and aluminum producers and the consequences of this effect for the economy at micro level.
Domestic producers in downstream industries
There are some negative consequences from the tariff as well. It will also lead to an increase in prices of inputs for steel and aluminum consuming industries and to an increase in prices for the industries that are hit by retaliatory tariffs following from the tariff imposed by the US. If producers in downstream industries pass the increase in cost price through to consumers, their products will become less competitive on the global market, but if they do not, their profits will decrease (Irwin, 2017: 48). Eventually, this might lead to firms that have to exit the market and jobs that will be lost. But, the first question is, how big will the effect of the tariff be on the prices of downstream products, how much will this price increase? This depends for a large part on the share of the product that is subject to the tariff (Congressional Research Service, 2019b: 25). It makes a difference whether 50% of the product made by a downstream producer is subject to the tariff or only 5% for example. Therefore, even though the downstream industries are much bigger in total, the effect of the tariff does
not need to be very big. The effect of the tariff depends, first of all, on the share of the product that is subject to the tariff. The bigger this share, the more the price increases. Secondly, the increase in price also depends on the capability of the producer to pass on the price increase of their inputs to the consumer. This has to do with a company’s market power. If a company is large and influential in its sector, it can be considered as a price setter and it will be able to pass most of the increase in price on to the consumer (Idem). However, if a company is relatively small, it is a price taker, which means it will not be able to pass on the increase in price for inputs to the consumer. Therefore, the effect of the tariff on prices of products in downstream industries depends on the share of inputs that is subject to the tariff and the capability of producers to pass on the increased input costs to the consumer. The net effect for the producer in the downstream industry is likely to be negative in both scenarios. If the producer is able to pass on the increase in input prices to consumers, its product will be less competitive compared to other products on the market, because it has a higher price. Higher prices usually lead to less demand and therefore it can eventually lead to a drop in sales and a decrease of profits, which might have all kinds of consequences (Krugman et al., 2015: 238). In the second scenario, the producer has to absorb the increased costs mostly on its own which will lead to a decrease in profits. This might lead to firms exiting the market, less investment, a contraction or a loss of jobs.
Figure 2. Causal mechanism downstream producers
Domestic consumers
Furthermore, the effect for consumers is also likely to be negative. The higher tariffs lead to price increases of the goods subjects to the tariffs and of the goods produced by the downstream industries (Irwin, 2017: 48). Generally, higher prices lead to less consumption, except for very luxury goods.
Figure 3. Causal mechanism consumers
How much the price will increase depends for a large part on the capability of producers to pass through the increased costs to their consumers. If these companies are big and powerful, they are probably able to do so. But, if they are relatively small, they should be considered as price takers. This means their profits will decrease, but the price of the product does not go up very much.
Retaliatory tariffs
For US exporters that are subject to retaliatory tariffs, the effect will be negative as well. They face a disadvantage compared to other producers. This might lead to a decrease in demand for US exports and a decrease in prices (Congressional Research Service, 2019b: 25). The effects of retaliatory tariffs are not the focus of this study, because it is no direct effect following from the policy implemented by the US government, it is a reaction to this policy. This thesis does not analyze primary data about the effects of the trade war in total, but the primary data about the effects of the import tariffs on steel and aluminum. However, the effects of the trade war, including the effects of the retaliatory tariffs, are a crucial component to evaluate the economic impact on swing states. Therefore, a short analysis of previous research into the effects of retaliatory tariffs and an overview of the trade war are included in the empirical section. This information is included before the empirical analysis of the data on the specific effects of the tariffs on aluminum and steel starts.
So, different effects of the tariff are at play. First, the direct effect of the tariff on the prices of raw steel and the primary production of aluminum. Second, the indirect effect of the tariff on the prices of products coming from downstream industries, the ones that use aluminum and/or steel as an input for their product. Third, the effects of the tariffs on prices for consumers and last, the consequences of the tariffs, the retaliatory tariffs from other countries. The question is how strong these effects will be. Even though it is hard to measure the precise effect of the tariff because there are many other factors
which might influence the causal mechanisms shown above, this thesis will make a contribution by investigating the plausibility of these mechanisms.
Hypotheses
In the theoretical framework different effects of tariffs are explained and specified for industry groups. The theory explained in previous sections leads to the following expectations.
Effects on different industry groups
❏ H1a: The steel and aluminum producing industries will benefit from the tariffs ❏ H1b: The steel and aluminum consuming industries will be hurt by the tariffs
Effects on different states
The relative importance of the steel and aluminum producing industries is different for different states in the US. In some states, the producing industries are important, while in others, they are not so much. The tariffs are expected to benefit the steel and aluminum producing industries. Therefore, there are some states that might benefit from these measures. The hypothesis that will be tested in this thesis to find out whether the tariffs have positive economic effects on specific states is:
❏ H2a: In swing states in which in the steel and aluminum producing industries are relatively important, the overall economic effect of the tariffs on the state will be positive.
However, there are many swing states that are more dependent on steel and aluminum using industries than on steel and aluminum producing industries. In those states, it is expected that jobs will be lost due to the tariffs imposed by the Trump administration. The hypothesis that will be tested in this thesis to find out whether the tariffs have negative economic effects on certain states is:
❏ H2b: In swing states in which the steel and aluminum consuming industries are relatively important, the overall economic effect of the tariffs on the state will be negative.
Research design
In this research the analysis will be split up into two parts. One part will be an analysis on macro-level, on the level of the United States as a whole. The second part will be an analysis on micro-macro-level, on state level. The first part of the analysis will focus on the different effects the tariffs have on domestic producers, downstream producers and consumers. Additionally, an analysis of previous research into the possible effects of retaliatory tariffs is added to the empirical section. The research question of this thesis is as following: How do Trump’s import tariffs on steel and aluminum directly affect the economic situation of voters in swing states in the United States? This is an investigation of the possible effects of the tariffs on aluminum and steel. It looks at a causal mechanism that runs from the import tariffs to the economic situation of voters in swing states in the United States. It is unclear what the economic effects of these tariffs are, but expectations are formed based on theoretical and historical knowledge. “From the standpoint of processes through which causality operates, an emphasis on causal mechanisms makes intuitive sense: any coherent account of causality needs to specify how its effects are exerted. Identifying causal mechanisms is a popular way of doing empirical analyses (King et al., 1994)”. By following the causal mechanism on macro-level, it will be possible to make an estimation about the plausibility of the causal mechanism and therefore about the relationship between the tariffs and the effects on the economic situation on state level.
In the second part of the analysis, the focus will be on how the different effects found in the first part of the analysis add up to each other on the level of the state. For the second part of the empirical analysis, the case study design will be applied. “Whatever the field of interest, the distinctive need for a case study research arises out of the desire to understand complex social phenomena (Yin, 2012: 4)”. Trump is such a phenomenon, his election, but more importantly, his policies and the effects of his policies. It is important to understand the effects of protectionist policies on the ground, on the state level. “The essence of a case study, the central tendency among all types of case study, is that it tries to illuminate a decision or set of decisions: why they were taken, how they were implemented, and with what result (Idem: 15)”. The result is what will be focused on in this thesis. To find an answer to the research question, the effects of the import tariffs on aluminum and steel will be examined in four swing states. Therefore, these four swing states are the cases of this research. The case study method is especially useful when one wants to study a small number of cases in depth and within its real-world context (Idem: 16). The case study that will be conducted will contain multiple cases, namely four cases and in the end, cross-case conclusions will be drawn.
There are some limitations to case study research. One of those limitations includes generalizability, the ability to generalize the results you find to a broader population. This is more complicated with a case study than with quantitative data analysis because the case is not
representative for a broader population (Idem). However, the goal of a case study is not to find generalizable results in the first place. The goal is to get in depth insights into the cases to understand that particular situation or effect better. This study will not provide hard proof for a direct relationship between the import tariffs on aluminum and steel and a changing economic situation on state-level. The case study design is not suitable for that sort of goal. Also, at this moment in time, this is not possible due to limitations in time and in available data. The import tariffs became effective from March 2018, which is relatively recently. Because this is such an actual subject and the relevant data is only available up to December 2018, it is still early in time to aim at delivering hard proof for such a relationship. Even though this study will not be able to proof whether or not the tariffs lead to changes in economic situation in the four cases, it will make a contribution by mapping out the causal mechanisms which illustrate the possible effects of the tariffs and the plausibility of these causal mechanisms.
So this thesis will take the form of a multiple-case study in which four cases will be studied to gain knowledge about the effects of import tariffs on steel and aluminum on the economic situation in swing states and the causal mechanism underlying these effects will be considered as well.
Case selection
Due to the different hypotheses that are formulated in the hypotheses section, there are different case samples and different cases that will be studied. Because the first two hypotheses (H1a and H1b) will be tested on the macro level, the United States as a whole, no specific cases within the US will be selected for this part of the study. For the second part of the study, which will test hypotheses H2a and H2b four cases will be selected. Case selection is an important step in the research. The population of cases will be all swing states in the election of 2016. These are: Colorado, Florida, Iowa, Michigan, Nevada, New Hampshire, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin (Johnston et al., 2017; Meko et al., 2016; BBC, 2016).
For hypothesis H2a, the sample will be the swing state in which steel and aluminum producing industries are crucial, and these cases will be typical cases to prove the theoretical assumption. The theoretical assumption is that in swing states in which the steel and aluminum producing industries are crucial, the import tariffs will have a positive effect on the economic situation of voters in those states. The state that fits best in this category is Pennsylvania as illustrated in table 1. This is the state in which the steel and aluminum producing industry plays a relatively more important role. In Pennsylvania, the steel and aluminum consuming industry is bigger in absolute terms than the steel and aluminum producing industry. This can be seen in all swing states, but in this state the steel and aluminum producing industry is relatively speaking the largest compared to the steel and aluminum consuming industry.
For hypothesis H2b, the sample will consist of the swing state in which steel and aluminum producing industry is relatively speaking the least important of all the swing states. The cases in this sample are selected as typical cases because if you expect aluminum and steel tariffs (X) to lead to negative effects on the economic situation (Y) these are the cases that you expect to be near the regression line (Gerring, 2008: 649). States that will be in the sample are Wisconsin, North Carolina, Colorado, Nevada and New Hampshire. The case I select from this sample is Wisconsin. This choice is based on the size of the job amount in the steel and aluminum producing and using industries and the importance of these industries for the state as a whole. In Wisconsin, the absolute numbers are bigger and the relative importance of these industries is also more important than in the other states.
To test the relationship between X and Y in the best way, I will also select the two states in which the relevant industries are the biggest. The states that fit in this category are Ohio and Michigan. These cases can be explained as influential cases, ‘an influential case is one whose status has a profound effect on the probability of a hypothesis being true (Gerring & Cojocaru, 2016: 403)’. Due to the size of the industries in these two states, one would expect the tariffs on steel and aluminum to have effects. Ohio and Michigan are the states, out of the sample of all swing states, in which the steel and aluminum related industries have the largest share of total employment in all industries.
Table 1. Overview of population of Swing States and employment in different industries, first quarter of 2017 (Data source: Bureau of Labor Statistics. (2018) Quarterly census of employment and wages. Available at:
https://data.bls.gov/cew/apps/data_views/data_views.htm#tab=Tables (consulted on March 22nd 2019).)
States Jobs in steel produ- cing industry Jobs in alumi- num produ- cing industry Total Primary metal manu- facturing Trans- portation equip- ment manu- facturing Machi- nery manu- facturing Electrical equip- ment manu- facturing Total Total producing as percentage of total consuming industry Ohio 7698 3500 11198 24905 126040 77,080 26,539 254564 0,0439 Penn- sylvania 11316 3515 14831 19905 36765 43,251 26,075 125996 0,1177 Florida 614 1129 1743 2851 40891 27,644 9,831 81217 0,0215 Michigan 5137 3529 8666 13496 189974 71,894 13,185 288549 0,0300 Wis- consin 248 770 1018 14477 27071 64,245 23,644 129437 0,0079
Virginia 973 953 1926 1995 38313 14,337 7,952 62597 0,0308 North Carolina 1180 572 1752 5667 34478 33,215 21,660 95020 0,0184 Iowa 1011 2933 3944 3122 14611 37,258 6,561 61552 0,0641 Colorado --- 216 216 1971 9607 12,210 2271 26,059 0,0083 Nevada --- --- --- 1222 1,261 1,728 1,545 5756 0 New Hamp- shire --- --- --- 2,351 2,221 6,719 4,148 15,439 0
--- Aluminum and steel producing industries are relatively speaking most important in regard to aluminum and steel using industries in these swing states
--- Aluminum and steel producing industries are relatively speaking least important in regard to aluminum and steel using industries in these swing states
--- Aluminum and steel producing and consuming industries are the biggest in absolute terms these swing states
So, four cases are selected, Pennsylvania, Wisconsin, Ohio and Michigan. The first two are selected because of the relative importance of their steel and aluminum producing and consuming industries. The last two are selected because of the size of those industries together. These four states are also the states in which the related industries are the biggest of all swing states in the table. Because these industries are relatively big, the chance that the tariffs will have real impact on the state’s economic situation is bigger as well. If no effect in these states can be found, there is a very small chance that an effect can be found in states in which these industries are much smaller and less important.
Dependent and independent variable
The independent variable in this thesis is the import tariff on steel and aluminum. The import tariff on steel is 25% and the tariff on aluminum is 10%. These tariffs were announced on the first of March 2018 and became effective on the 21st of March 2018 (US Customs & Border Protection, 2018). First, these tariffs were implemented against most countries and they were expanded towards the EU, Canada and Mexico on the first of June 2018. The tariff is now set at 25%, but for Turkey, the tariff is 50% (Idem). The exact industries covered by the tariffs are outlined in Appendix I.
The dependent variable is the economic situation in swing states. Economic situation needs some further specification. It will be operationalized as a number of factors, namely, real GDP, employment, average weekly wage, hours worked and consumer price index (OECD, 2013: 34-35). These factors combined give an overview of the economic situation of people living in these states. Real GDP is quite an aggregate measure, therefore the real GDP per state will be used in this thesis. Also, employment and wages in specific industries will be analysed to look at the direct effects of the tariffs on aluminum and steel. Theoretical knowledge provides expectations about the possible effects the tariffs might have on these specific sectors and therefore these sectors will be subject of examination to answer the research question. Due to the fact that wages are often recognized as an important indicator for trust in the economy (IMF, 2017: 76), an increase or decrease can be seen as a first step towards the positive or negative economic cycle of development. The outcomes will be compared with the overall development of wages and employment in all four cases. To measure these variables, data will be used. Data that will be analyzed in this thesis comes from The World Bank, the Bureau of Economic Analysis, the Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis.
Empirical analysis
The empirical analysis consists of three parts. The first part will give an overview of the economic situation in the US in general and the development of the trade war which is going on. This part of the analysis cannot answer the research question directly but is crucial to develop a well-informed and complete answer the research question in the end. The second part of the empirical analysis will test hypotheses H1a and H1b and the last part of the analysis will look at how the effects of the tariffs on aluminum and steel add up to each other on the state-level. Therefore, part three will test H2a and H2b.
Part I: Overview economic situation US & trade war
Economic situation in the US: general trends over time
In the last five years, GDP has been growing steadily in the United States. In the four states that are the cases of this analysis, GDP has been growing as well. Even though the states are not equal in terms of GDP, their growth rates are similar. The growth of the GDP is one of the factors that indicate economic well-being and it has improved over time. A second indicator of economic well-being that will be used to give a general overview of the economic situation in the US is unemployment rate. Unemployment rate is one of the numbers that has reached the news quite a lot lately, because it is historically low. If we look at the data, one could see that the unemployment rate has gone down rapidly in the past five years. This is the case for the US as a whole and for Ohio, Michigan, Pennsylvania and Wisconsin, the four cases of this study. The following graph illustrates this development:
Graph 2. Unemployment rate (Data source: Bureau of Labor Statistics. (2019b) Current population survey.
Available at: https://www.bls.gov/cps/ (consulted on June 7th 2019).)
What is remarkable from the development shown in graph 2, is that all cases, except from Wisconsin are having higher unemployment rates than the average of the United States as a whole. I would say this is remarkable because at the start of this graph, in 2014, all cases except from Michigan were performing better than average. Therefore, it is possible to state that the rest of the states have been doing better in the past 5 years in reducing their unemployment rate than the cases that are covered in this analysis. Also, the information in this graph indicates that Michigan is closing the gap with the average unemployment rate, while Ohio and Pennsylvania are now performing worse than average, while they were performing better than average five years ago. So, in terms of unemployment rate, all states are performing better than five years ago, but compared to the average unemployment rate of the United States, only Wisconsin is performing better. Michigan is in a positive development towards the average unemployment rate and Ohio and Pennsylvania have experienced a slower decrease in unemployment rate than average.
A second indicator of economic well-being is wages. Therefore the average weekly wages in US dollars can be seen in the next graph:
Graph 3. Average weekly wages, in US Dollars (Data source: Bureau of Labor Statistics. (2019c)
Employment, hours and earnings CES. Available at: https://www.bls.gov/ces/ (consulted on June 7th 2019).)
What stands out is that the line of average weekly wages of the US as a whole is far above all the others. This illustrates that the wages in the states that are selected as cases in this study are substantially lower than the average of the United States. People living in these states earn less and are most probably relatively less rich compared to the average US citizen. However, this graph does not say much about the purchasing power of citizens in different states. It might be the case that prices are also lower in Ohio, Michigan, Pennsylvania and Wisconsin. Therefore, in the detailed analysis, the Consumer Price Index will be used. But, this graph does show us an increase in wages in the past five years and underperformance of the cases compared to the average of the US.
Graph 4. Average hours worked per week by all employees (Data source: Bureau of Labor Statistics.
(2019b) Employment, hours and earnings CES. Available at: https://www.bls.gov/ces/ (consulted on June 7th 2019).)
Graph 4 shows the average hours that are worked by employees per week. This indicator is useful for a general overview because it indicates economic prospect. An increase in hours worked is a positive sign for the development of the labour market (Pietschmann et al., 2016: 22). The average number is shifting between 34 and 35 hours per week. Substantial growth or decline can not be identified in the past five years for the United States as a whole. Again, most of the cases of this analysis are performing worse than average. Only Michigan is behaving more or less in the same way as the USA. Especially Ohio and Wisconsin are standing out, the average hours worked per week are lower than average and in Wisconsin the average hours worked in 2019 were less than in 2014. So, Wisconsin might be the case which shows the lowest unemployment in percentages, but this might have to do with more people working part-time jobs.
These graphs do not indicate what kind of effects the tariffs on steel and aluminum have and can therefore not be used to answer the main research question of this thesis. However, they do indicate some general trends over time and give a short overview of the economic situation of my cases. In
terms of trends over time, it is clear that the economy of the United States is doing well. The GDP is growing, unemployment rates are dropping and wages are increasing. This is the case for all cases in this study and for United States average. In the past five years the economy of the United States has improved, regardless of changes to economic policy. The development of economic progress can be witnessed all around the world. This is something that should be kept in mind when taking a closer look at the effects of the tariffs on steel and aluminum at state level. The overall growth of the world’s economy might blur the effects of the tariffs for now. To find out what the effects of tariffs are for people’s economic well-being at state level, a more detailed analysis will follow in later sections.
Trade war overview
Despite the fact that this thesis does not examine the effect of the trade war in total, it is important to have an overview of the retaliatory tariffs to give an informed answer to the research question. Especially the fact that the retaliatory tariffs are targeting the US manufacturing industry is important, because some of these industries are steel and aluminum downstream industries (Bown & Kolb, 2019). This implicates effects on these industries can be partially caused by the US tariffs on aluminum and steel and by retaliatory tariffs from other countries.
