05 March 2018

CEPS: Trump’s trade policy turns destructive

On March 2nd, Trump suddenly announced a general (i.e. non- discriminatory) punitive tariff of 25% on steel imports and 10% on aluminium imports based on section 232 of the 1962 US Trade Expansion Act. The asserted rationale – that the imports posed a threat to national security – is one of the bluntest and most-rarely used arguments amongst WTO partners.

Worldwide, in Europe but also in the US, the sudden announcement by President Trump provoked a storm of protest and led to immediate calls of retaliation by leading trading partners, including Canada (leading exporter to the US for both steel and aluminium), the EU and China, if not many more. Who in the WTO ever expected to fall back into the drama and destructive scenarios of previous trade wars? The spectre of trade wars was something to be studied in economic history books – with harsh but clear lessons to avoid them at all costs – and in the field of simplistic tariff war analysis, yielding equally convincing negative results for all players and an overall shrinkage of trade flows. And, as if this is not bad enough, the impulsive nature of Trump’s decision conveys a powerful signal of uncertainty, which cannot be interpreted in any other way than as undermining a rules-based system. Indeed, choosing national security as the rationale for these tariffs for all foreign suppliers breaks a taboo that has so far restrained all WTO partners from employing outright mercantilist measures, because there is no ‘objective’ way to assess at the multilateral level what is and what is not a particular country’s national security. Moreover, there are other tools available and indeed already employed extensively (if perhaps not excessively) by the US.

Simply observing that China is no longer a principal steel supplier to the US begs the question: why? The answer is simple: China already suffers from a battery of other measures curtailing or stopping its steel exports to the US, with anti-dumping duties going beyond 100% or even 200%, occasionally topped up by countervailing [anti-subsidy] duties of similar magnitudes. Safeguard measures have also been employed. It is bizarre to impose a 25% tariff on all suppliers, as it cannot possibly result in much of a further constraint of Chinese steel exports to the US, whereas it is bound to hit many other suppliers which are, as a rule, not the source of excessively low prices or dumping. Yet, the countries of these suppliers are pushed, inevitably although reluctantly, to engage in a game of tit-for-tat.

The economics of such trade wars is depressively dismal. First, there is the strong likelihood that, insofar as any steel jobs might be ‘created’ in the US, the indirect effects of job losses for steel-using sectors such as cars, construction, etc., or canning and airplanes for aluminium, are larger.[1] In other words, in being futile, these tariffs are also bad domestic policy. And this is (naively) assuming that no retaliation will be launched. Second, the retaliation will typically be selective, inflicting economic pain on specific regions[2] and sectors. Third, the uncertainty resulting from this extreme form of plain protectionism will have a chilling effect on trade and investment, and even more so on ongoing or planned trade negotiations with the US.

The potential damage to EU steel exports to the US is likely to be considerable. But there is a secondary, presumably even larger effect: other steel suppliers in the world will seek market outlets for the now (artificially uncompetitive) exports to the US, and one big market they are probably targeting is the EU market. This deflection of trade might take place at reduced prices as so to find buyers in Europe that are now being supplied by others. The Commission and EU member states with relatively large steel output are already calling for the employment of ‘safeguard measures’, which consist of a WTO-based curtailing of imports in the event that a country is suddenly flooded with specific imports that cause or threaten to cause injury.

It is, of course, still early days but it is good to discern the pattern to be expected. The punitive US tariffs applying to all suppliers foreign to the US not only causes many (if not all) of them to go for tit-for-tat, a dangerous development, but also to seek other market outlets all of a sudden, giving rise to safeguard measures by the EU but probably also elsewhere. Although so far only applying to steel,[3] the retaliation will undoubtedly spread restrictions to other product sectors and there is a risk – not least, given Trump’s mind set and zero-sum conception of trade – that this will prompt yet another round of tariff hikes on different products. On March 3rd, Trump threatened the EU with a new tax (tariff presumably) on cars, if the EU were to retaliate against the steel measures. Although it is not clear what WTO-compatible measure can be employed by Trump to do so, the flimsy nature of the rationalisation of the steel measures goes to show that he might be ready to violate WTO rules in a tit-for-tat logic. [...]

Full commentary on CEPS

European Commission responds to the US restrictions on steel and aluminium affecting the EU

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