Value vs. Price and its relation to tariffs

Question

I’m naturally against tariffs as they impede on free trade, and end up hurting the consumer by inadvertently becoming a tax on imports as well as raising the cost of goods. So I'm trying to challenge my natural assumptions as best I can.

I know the Hayekian school of thought is that the cheaper and more widely available products/materials are the better for the consumer, but I wanted to pose the question that if cheaper doesn't necessarily equal quality why is cheaper always being preferred ? For instance with Steel, I've read numerous publications citing American Steel & Aluminum to be of far greater strength and quality than overseas Steel. Does it all boil down to the freedom to choose as Milton Friedman says ? What is the cost / benefit analysis on something like a Tariff on Steel & Aluminum if its a far better product which might require us to buy less of it over-time ?

I remember growing up my father would say that he didn’t care that he could buy a microwave for 30$, and that he would gladly pay triple or quadruple for a superior product that would last a lifetime. Do we rely too heavily on affordability ?

Sub-Question : I’ve noticed prominent speakers like Victor Davis Hanson say that these Tariffs are so minuscule no one will notice them. Apparently 70% of steel used in the United States is American Steel and China is actually 11th on the list of steel & aluminum providers. Is there too much hyperbole that a steel & aluminum tariff will cause a trade war ?

Answer 1

You asked "why is cheaper always being preferred". Well, it's not. People routinely pay more for quality. Cheaper is almost always preferred for identical products. But cheaper is not always preferred for goods that are only partial substitutes. For example, a well-made pair of shoes that will last ten years, will cost more than an equally-comfortable pair that will last one year. But will cost less than ten times as much, and many people who can afford the well-made pair, will buy them.

"I've read numerous publications citing American Steel & Aluminum to be of far greater strength and quality than overseas Steel"

There are many different grades of steel. These guarantee certain proportions of metals, that in turn guarantee certain physical properties. And they come at different costs, and thus different prices. It doesn't make sense to say "this country's steel is better than that country's steel" - that's jingoism, not economics, not materials science. What matters is the grade of steel being produced, and its price.

"these Tariffs are so minuscule no one will notice them": if that was the case, there'd be no point in flouting international agreements to implement them. The big issue is that this signals an administration that is willing to cause itself and other countries economic harm, in the interest of pursuing an ignorant, silly ideology.

Answer 2

At a market equilibrium, marginal cost and marginal utility are equal. This does not mean that the cheaper good is preferred.

Note that the US imports primarily higher quality steel at a higher price, and not lower quality steel at a lower price.

Regarding the subquestion: As for how it could cause a trade war, this is probably related to a belief that if allies and trading partners do not commit to reciprocal measures, then more of the same unfriendliness will be delivered. For example, when the EU proposed a monetarily equivalent level of retaliatory tariff, Trump suggested he might enormously hike tariffs on EU automobiles. Otherwise stated, people don't like to be threatened, and might prefer to burn cash than to have the bully make off with their lunch money. In the meantime, it could be worth asking who'd like to see economic harm occur to Western countries, at their own hands (the context being one where China probably does not want to have tariffs on their steel exports or additional trade restrictions related to EU or Japanese responses).

Answer 3

Let me answer to the sub-question and the potential trade war.

Chad Bown in a recent Vox CEPR column estimates that Trump's steel and aluminium tariffs would impose trade losses on partners equal to \$14.2 billion per year, an amount establishing the collective permissible retaliation.

The countries hit the hardest by Trump's tariffs would be Canada (\$3.2 billion), the EU (\$2.6 billion), South Korea (\$1.1 billion), and Mexico (\$1.0 billion). If those estimates are correct trading partners would be permitted to retaliate by a collective amount of $14.2 billion per year under WTO dispute settlement.

Answer 4

Cheaper can be a preference but is not always a preference. Consider a company that is building a new building on leverage. They expect profits in the future, but are currently not profitable. They may obviously prefer cheaper steel, as you know, because they are simply limited on funds. It is like when I was in college, i’d Buy cheaper batteries, knowing that they wouldn’t last as long, because I was short on money, and got paid sporadically. Due to my income schedule, I chose cheaper, even though it cost more in the long-run. It was a preference due to complex circumstances based on when I got paid, and how much I had available at a given time.

If steel costs so much that the marginal benefit of having steel last for 10 additional years does not offset the marginal cost of paying 50% more for the steel, it would make sense that one would buy the cheaper steel (from China) if they are thinking at the margin (which most firms do). The tarrif would make those countries even more likely to buy Chinese steel, because the marginal cost of a unit of American steel has just risen. As you wisely noted, this is not a good thing. A tax obviously will decrease demand, further depressing the steel industry. The only way to improve the steel industry is to produce more at a lower cost. Similar to the farming industry, our output boomed in spite of fewer farmers. This was a net benefit to society even though it created fewer farmers. My girlfriends brother doesn’t HAVE to be a farmer precisely because of this dynamic. He can do something else and have a higher standard of living. It is not “bad” that he can do something that his grandfather did not do. It means we got more efficient and improved our living standards. This is why I believe Trump’s policy is suspect.