The new US tariffs suggest that the Trump administration is willing to subsidize American steel and aluminum, even at the expense of far bigger US industries — and world trade.
RECENTLY, the US Department of Commerce recommended imposing heavy tariffs or quotas on foreign producers of steel and aluminum in the interest of national security. Commerce Secretary Wilbur Ross urged President Trump to take immediate action by adjusting the level of imports through quotas or tariffs.
Trump is likely to invoke the Section 232 of the 1962 Trade Act, which allows the president to impose tariffs without congressional approval. He must respond to the Commerce reports by April 11 and 19 for steel and aluminum, respectively. Meanwhile, the main targets of the proposals in Asia, Europe, the Middle East, Latin America and Africa are preparing retaliatory measures.
Reportedly, Trump is now considering the “harshest tariff options” on steel and aluminum imports and planning to promote his ultra-trade hawk Peter Navarro. In one way or another, the repercussions will be global.
Trump’s tariff and quota options
While the proposed measures extend from broad adjustments that involve many countries to targeted adjustments that focus on a few countries, the rationale of the suggested figures is fuzzy and ultimately undermined by geopolitical considerations.
In steel industries, the Commerce Department recommended three options.
A global tariff of at least 24 percent on steel imports from all countries.
A tariff of 53 percent on all steel imports from 12 countries (none are advanced economies, except for South Korea), with a quota on steel imports from all other countries equal to 100 percent of their 2017 exports to the US.
A quota on steel products from equal to 63 percent of each country’s 2017 exports to the US.
Reportedly, Trump is now considering the first option: a global tariff of 24 percent on steel imports.
In aluminum, the Commerce Department had another three recommendations.
A 7.7 percent tariff on imports from all exporter countries.
A 23.5 percent tariff on aluminum products from China, Hong Kong, Russia, Venezuela and Vietnam, with a cap for all countries at 2017 import levels.
An aluminum import quota on all countries of 86.7 percent of their 2017 imports.
If recent reports are accurate, Trump would consider a 10 percent duty on all aluminum entering the US, which is more than two percentage point higher than the Commerce Department’s first option. Assuming these choices will prove valid, they are not the harshest ones. They would not focus on the biggest steel or aluminum importers in America, but slap broad sanctions against all importers that have a major deficit with the US.
Yet, President Trump is given substantial geopolitical leeway for the final decision. He could have specific countries exempted from the proposed quota, based on US economic interests or national security. He could take into account the countries’ willingness to cooperate with the US to address global excess capacity (read: turn against China) and other challenges that face US aluminum and steel industries.
The leeway permits Trump to exploit unilateral geopolitical objectives to undermine any semblance of multilateral economic cooperation and to play targeted countries against each other.
Broadening new protectionism
In his 2016 campaign, Trump targeted those economies with which America has the largest aggregate trade deficit. To legitimize an offensive trade policy, which has a highly questionable legal basis, he is starting by focusing on steel, but is expanding to aluminum. However, the ultimate objective is to target America’s deficit partners. The proposed measures are just means to that final goal.
In 2017, US imports increased 34 percent to $22 billion. The top 10 source countries for steel imports represent 78 percent of the total steel import volume. Canada accounts for the largest share (16 percent) followed by Brazil, South Korea, Mexico and Russia (Figure a). Interestingly, China is not even among the top-steel importers in the US.
In 2017, US aluminum imports increased some 31 percent to $13.9 billion, while US production of primary aluminum decreased for the fourth consecutive year to the lowest level since 1951. Like in steel, Canada is the leading source of aluminum imports into the US, accounting for more than two-fifths of total imports by value and weight. Imports from China amounted to only half of that (Figure b).
What about the US trade deficits? In 2017, America incurred a $863 billion deficit. The highest deficit was with China ($396 billion), followed by Mexico ($74 billion) and Japan ($72 billion). These are the countries that Trump is really after (Figure c).
To achieve that objective, the White House seems to be willing to risk its economic and strategic cooperation with China, undermine ties with its NAFTA partners, alienate the NATO allies in Europe and undercut alliances with the rest of its trade and security partners in Asia, the Middle East and South America.
South Korea is already considering filing a complaint with the World Trade Organization if the US levies heavy duties on steel. Canadian Prime Minister Justin Trudeau has called the tariffs “absolutely unacceptable.” European Commission President Jean-Claude Juncker warns the bloc is prepared to respond forcefully by targeting imports from the US, starting with Harley-Davidson motorbikes, Levi Strauss & Co. jeans and bourbon whiskey. In turn, Trump is promising to “apply a tax on their cars.”
In view of global growth prospects, the implications of Trump tariffs would be adverse. However, if the Trump administration’s final goal is to target all US deficit partners, this is only the beginning and early repercussions will also be felt in Germany, Italy, and Ireland, Brazil and Argentina, Malaysia and Vietnam, South Africa and India.
From Kennedy trade to Trump slump
Trump is likely to resort to Section 301 of the Trade Act of 1974 to unilaterally seek remedies for unfair Chinese trade practices, which will risk Chinese retaliation and a trade war, just as America’s Tariff Act of 1930 did with dark consequences. Such moves risk undermining not just international trade but the very institutions —trade-dispute resolution mechanisms—that support it.
Ironically, in 1962 President Kennedy used the Trade Expansion Act to negotiate tariff reductions of up to 80 percent, which paved the way for the Kennedy Round of General Agreement on Tariffs and Trade (“GATT”) negotiations and eventually to the World Trade Organization (WTO). In contrast, President Trump is exploiting the seldom-used Section 232 of the Act to increase trade barriers.
Unlike President Kennedy who sought to expand trade worldwide, it seems that Trump – if he opts for the tariff track – is intent to undermine or reverse 50 years of trade progress in just a few years.