Keeping Our Critical Industries Alive

Some industries are hard to replace when lost.

Behind the proposed tariffs on steel and aluminum is the realization that it is a matter of national security that we retain a vigorous metals production capability to shield against the possible loss of overseas sources of supply.

One of the roles of government is to insure the long-term stability and security of the nation, which must include considerations such as what industries do we need to maintain and at what levels.

What happens, though, when a critical industry faces foreign competition that threatens to put it out of business?

The federal government faces several options in this case:

• Let the industry collapse and hope that it can be ramped back up in time in the event of supply interruptions.
• Subsidize the industry with a combination of tax breaks, direct payments, or other incentives.
• Impose protective tariffs on foreign imports.
• Nationalize the industry and have the government operate it.

Of these options, I consider the second the best option.

Why are subsidies preferible to tariffs?

• Tariffs increase the costs to all industries for the product subject to the tariffs, which acts like a tax on consumers.
• Tariffs are usually met tit-for-tat with other nation's tariffs on our products which hurts our exports.
• The domestic cost of protective tariffs are hard to anticipate or ultimately calculate, but most studies have generally shown that their cost to be quite high, much higher than we would have intended for the number of jobs that are saved.

Therefore, if we are thinking about putting a protective tariff in place, we should first think about helping the industry in question operate profitably under all market conditions, which could include having the U.S. taxpayer taking an equity stake in a struggling business or even partial or full nationalization, much like we did when Detroit was faced with fiscal collapse after the 2008 recession.

It is worth noting that direct support to critical industries is the preferred method that the Chinese have used to grow their own critical businesses, and are one of the reasons why these companies can export their goods at such low prices.