- Proposed tariffs on steel and aluminium could not only hurt America’s allies and rivals alike, they could violate a trust the world’s trading partners have kept since World War II.
- The Trump administration’s invocation of national security sets a dangerous precedent, especially when it comes to China.
- Countries would have the right to retaliate in equal measure in other industries if these tariffs are enacted, and the result could be a trade war.
If President Trump puts in place steel and aluminium tariffs recommended by the Commerce Department, his administration will be crossing an unspoken line in the sand no country has crossed since World War II.
That is because the administration is invoking national security to justify these tariffs, which could hit our allies and rivals almost indiscriminately. Trade experts say that doing this opens up a Pandora’s Box that World Trade Organisation [WTO] member nations have been responsible enough to keep closed.
This lowers the bar for starting a trade fight. National security can be used to justify almost any action when relationships are strained, and experts fear that now that it’s on the table, countries can use it against each other – and perhaps against us.
One such expert, Lee Branstetter, a professor of economics at Carnegie Mellon, said it would “set a precedent that anyone, especially the Chinese, can use against us.”
What he means is that once the US starts invoking national security to protect industries, everyone can do it. That’s why no one has done it. The international trade system is built on trust, and no one has violated that trust to this degree.
The proposal includes draconian tariffs and quotas on aluminium and steel imports. The steel tariffs in particular could cause problems with several close US allies. For all the talk of China, the lion’s share of US steel imports come from friendly nations like Canada and Brazil:
Bush did it
Back in 2002 President George W Bush slapped a 30% tariff on steel imports. It was gone by 2003, lasting about 20 months, after steel producers around the world, from Brazil to China to the EU, got together and lodged a complaint with the World Trade Organisation (WTO).
Now, Bush did his tariffs differently from Trump. Instead of rationalizing them using national security, he used a Section 201 report, which simply determines whether or not imports are doing damage to domestic industries.
Either way, in 2002 the EU, especially, was ready to put a hurt on the US economy. It was promising to put up tariffs worth $US2.2 billion that would hit critical swing states.
The retaliation that the EU has promised leading up to the writing of this report looks much the same. According to the Financial Times, EU officials are considering tariffs on everything from orange juice to whiskey to dairy, if the tariffs are enacted against them.
“The proposed cure is worse than the disease,” Branstetter told Business Insider a few weeks ago, adding that it’s “quite likely” US allies and rivals would retaliate.
“The WTO will give them a right to inflict equal pain on other industries,” he said.
There are plenty of industries in the US that export a lot of goods to China. Retalitation could badly hurt those industries:
Our current condition
Obama also put tariffs on Chinese steel, but in a more targeted fashion. That didn’t help the US much either though. In fact, there’s been a lot of talk about how tariff-induced higher prices are hurting US manufacturers that use steel as an input.
Here’s Australian bank Macquarie talking about it back in 2016:
“While output has been carefully managed by US producers to help maintain the tariff-driven price premium over other regions, apparent demand is clearly not good at -10% YoY over 2016 to date. While destocking can explain part of this, we would reiterate our concern that higher steel prices are hurting US manufacturing competitiveness (and thus steel demand). As our recent note showed, the US is the biggest negative drag on global industrial production at the present time.”
In short, manufacturers that depend on cheap steel for their supply chains get hurt in these scenarios. When all was said and done with the Bush tariffs, the Institute for International Economics (IIE) estimated that as many as 26,000 jobs were lost in steel-using industries (like the auto industry, for example).
Tariffs and trade wars can also play a role in the specter currently haunting the markets – raising the price of inputs (like commodities such as aluminium and steel) is inflationary.
And right now, there are a confluence of inflationary factors impacting the US economy in a meaningful way for the first time since the financial crisis.
- A weak dollar (some say because the market is worried about trade actions like this one).
- A tax cut.
- A massive budget deal.
Interest rates are low, and the Federal Reserve has already planned to hike them, but hiking them too fast – to curb inflation should it decide to roar back – will hurt consumers. It could tip us into recession.
Retaliation from our trading partners will also do damage we can’t quantify yet. It’s hard to see why they would have even as much patience as they had for Bush’s tariffs in our current geopolitical environment. Trump has been antagonizing our allies and our rivals alike when it comes to trade, and they have made it clear their patience is wearing thin.
Trade is a system built and maintained through trust, and right now that is in dangerously short supply.
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