By: Uzair Salman
Imposition of punitive tariffs on steel and aluminium imports
Unswayed by warnings of a trade war, President Donald Trump, on March 08, ordered steep new tariffs on steel and aluminum imports to the United States, vowing to fight back against an “assault on our country” by foreign competitors. Flanked by steel and aluminium workers and key staff, Trump said he had to act to stop the “decimation of entire communities” and insisted there would be a very fair process as the administration sought to use next 15 days to negotiate exemptions with allies. Canada and Mexico will be exempted. “Steel is steel,” said Trump, “without steel you don’t have a country.”
President Donald J. Trump has announced that he will apply across-the-board tariffs, or import taxes, on steel and aluminum. Trump argues that the measures are necessary to protect US national security, which he claims has been degraded by the decline of the domestic steel and aluminum industries. Many economists, however, say that previous experience shows that such tariffs will likely fail to revitalize domestic producers while imposing costs on the rest of the economy. Meanwhile, trade experts worry that the tariffs – 25 percent on steel and 10 percent on aluminum – could set off a trade war that could ensnare some close US allies, such as Canada, and undermine the global trading system.
1. What is a trade war?
The dictionary says it is “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the threatened retaliation from other countries certainly meet that definition, but so do centuries of protectionist skirmishes by numerous countries in countless sectors, not just the US and not just in steel. What could make this episode more war than skirmish is Trump’s invocation of national security to justify tariffs – which could open a Pandora’s box of similar claims by other nations – and his threat to further punish any country that reacts by imposing counter-duties.
2. What are tariffs?
A tariff is a tax or duty that the government places on a class of imported goods (tariffs on exports are very rare). In theory, this makes the foreign products more expensive, and therefore less desirable to consumers — boosting domestic makers of the product, which don’t have to pay the tax. The tariff is collected by customs officials and goes to the government.
3. Why Trump put tariffs?
The goal is to protect domestic industry by propping up American steel and aluminum manufacturers. The hope is that as steel and aluminum from other countries gets more expensive due to the new taxes, more businesses will turn to American steel and aluminum makers to fill demand. Theoretically, that would breathe new life into industries that have been struggling for years.
4. Does Trump say it’s a trade war?
He suggested so with a March 2 Twitter post that declared trade wars “good, and easy to win.” Three days later, discussing his proposed tariffs, he said he didn’t think they will lead to a trade war. Trump’s focus is the US trade deficit, which shows the country imports hundreds of billions of dollars more than it exports. Stepping back from trade deals like Nafta and the Trans-Pacific Partnership also appeals to Trump’s base of voters in America’s Rust Belt. But talk of a trade war is alarming to many US business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth if the US turns protectionist and other countries retaliate.
5. Who might retaliate?
The EU warned it would respond with its own 25 percent tariffs on $3.5 billion of American goods. The bloc is targeting iconic US brands produced in key Republican states on a range of consumer, agricultural and steel products. The strategically chosen list includes motorcycles, blue jeans and bourbon whiskey. In turn, Trump warned that he would impose a 25 percent penalty on European car imports if the EU carried out its threat. Chinese officials are looking at a range of trade penalties on US imports, from soybeans to sorghum. China’s foreign minister, Wang Yi, vowed a “justified and necessary response” to any efforts to incite a trade war.
6. Who wins in trade wars?
No one, if history is any guide. When President George W. Bush raised steel tariffs in 2002, US gross domestic product (GDP) declined by $30.4 million, according to the US International Trade Commission. The US lost about 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved. The World Trade Organization also ruled that the Bush tariffs were illegal.
7. What does China have to do with all this?
A lot. In the past, the president’s rhetoric on steel has targeted China, the world’s largest steel exporter. He has laid into China for sending cheap, excess steel into the global market, which he says makes it impossible for American steel companies to compete.
Whether a trade war will erupt now depends in large part on China’s reaction. So far, it’s been muted. But China has threatened to be tough in response to steel and aluminum tariffs in the past. There are a number of US industries against which China could retaliate, if it chooses to do so.
The Trump administration is also investigating intellectual property theft by China. The outcome of that probe could play into Beijing’s response.
8. Could these steel tariffs backfire, too?
Maybe, since many more people are employed in industries that buy steel to make products, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policymakers, who might feel the need to raise rates more aggressively than planned. On the other hand, if the tariffs result in job losses and the economy slows, the Fed might want to ease the pace of rate hikes.
9. What’s the role of the WTO?
The arbiter of international trade disputes, WTO was born in 1995 out of a set of agreements struck by countries trying to reduce trade barriers. If a government’s complaint about another nation’s trade barriers is seen as grounded, the WTO recommends acceptable retaliation. But tit-for-tat actions that unfold quickly might test the WTO’s somewhat ponderous deliberative process. In the case of steel, Trump is invoking a seldom-used clause of a 1962 US law that gives him the authority to curb imports if they undermine national security. Under WTO rules, countries can take trade actions to protect “essential security interests.” Other nations could challenge the validity of the US use of that clause. They also could copy the US move by citing national security to block imports themselves.
10. What happened in previous trade wars?
One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 and often blamed for deepening the Great Depression. The law hiked US tariffs by an average of 20 percent. The duties originally were proposed to protect American farmers but many other industries lobbied for and won similar protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff. In the 1980s and 1990s, Japan was the target. Ronald Reagan slapped tariffs on Japanese electronics and motorcycles, and forced Tokyo to accept quotas on cars and steel. Bill Clinton picked up the torch in the early 1990s by threatening steep tariffs on Japanese cars and demanding that Japan rein in its current-account surplus.
11. Are tariffs the only weapon in trade wars?
No, there are many others. Clamping down on Chinese investments in the US, which Trump may already be planning, is one example. Talking down, or manipulating lower, one’s currency is another. Countries through the years have used other means to keep foreign goods out and protect homegrown companies, a practice known as mercantilism. Trump accuses China of using government subsidies to prop up its domestic industries. Some practices are overt, such as quotas, and others covert, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.
Risks to Global Trade
Trump’s actions, especially if they are applied broadly rather than targeted at offending countries, run the risk of sparking a cycle of retaliation – a trade war.
Some of Washington’s closest allies would be hardest hit. The largest exporter of steel to the United States is Canada. Germany, Japan, and South Korea are also among the top–ten exporters, and China is only the eleventh largest. Canada called the tariffs “absolutely unacceptable,” while top European Union officials said they are developing plans to retaliate. Some European companies said they were putting US investments on hold in response.
Retaliatory tariffs could put other US industries in jeopardy as well. China is already reviewing whether to restrict imports of American wheat and soybeans in response to previous tariffs, and experts say Beijing could expand that policy to other major US imports, including technology, aircraft and intellectual property.
How Trump’s proposals are different from those of the past?
A number of previous presidents imposed tariffs or other trade barriers to protect US industry from cheap foreign imports. Presidents Lyndon B. Johnson, Richard M. Nixon, Jimmy Carter, and Ronald Reagan applied either quotas – import limits – or price floors on steel. Economic studies have concluded that these measures did little to stop the decline of the industry.
More recently, the administrations of George W. Bush and Barack Obama both applied steel tariffs. Bush imposed broad tariffs of up to 30 percent on steel imports in 2002. These were meant to last three years but were withdrawn early, after the World Trade Organization (WTO) ruled against them. Research shows these tariffs cost the US economy as many as two hundred thousand jobs. Meanwhile, Obama applied tariffs of up to 522 percent on some Chinese steel in 2016.
The Commerce Department also regularly applies targeted antidumping duties on specific steel products that it finds benefit from unfair subsidies; there are over a hundred such trade remedy actions currently in place.
But economists say that Trump’s proposal is different. Trade expert Chad P. Bown calls the policy “unprecedented” in both its scope and legal justification. Previous tariffs targeted specific countries, such as China, or included exemptions for close allies, as Bush did. Trump says his tariffs will apply to all countries.
Further, Trump’s use of a national security law to implement the tariffs is extremely unusual, though Reagan used the same law for more limited purposes. While normal trade actions follow public investigations, Trump’s process was opaque. The law also gives the president total discretion over how and for how long to apply the tariffs, unlike other trade actions, which are based on economic conditions and subject to periodic review.