March 5, 2018

TSC IntelBrief: Off-The-Cuff Trade Wars 

The logo for U.S. Steel appears above a trading post on the floor of the New York Stock Exchange. (AP Photo/Richard Drew)
  • On March 1, President Trump announced suddenly that he would impose tariffs of 25% on imported steel and 10% on imported aluminum in an incident chaotic even by White House standards.
  • On March 2, President Trump stated that ‘trade wars are good, and easy to win,’ continuing an upheaval of global markets.
  • It is impossible to predict what will happen but basing the tariffs on national security is unprecedented and might be copied by other countries.
  • As with coal and solar, the President is trying to protect an industry that is much smaller than the ones he threatens with protectionist measures.

The world’s largest economy appeared to take a sharp backwards turn toward the protectionist measures of the 1930s. On March 1, President Trump announced that the United States would be imposing tariffs of 25% on imported steel and 10% on imported aluminum. The announcement was unexpected and created immediate turmoil in global markets. In keeping with his mercurial and intentionally chaotic style of governance, President Trump vacillated, then made the announcement, but then stated the official decision would be delayed a week. The long-term effects of these tariffs, if they are imposed, are unknown but historically they will be matched by targeted countries with their own tariffs; the broader the tariff—and the ad hoc announcement by the President spoke of no exceptions or any details—the broader the reciprocal tariffs, leading to a ‘trade war.’

On March 2, the President escalated his own rhetoric, tweeting: When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy! The U.S. hasn’t embraced trade wars since the 1930s, a time of disastrous tariffs such as the Smoot-Hawley Act that rose import taxes on nearly all imported goods. In a follow-up statement, the President stated that it was not just tariffs he was considering raising but all import taxes (or duties), tweeting that ‘We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as they charge us.'

The issue of the U.S. ‘being taken advantage of’ in multilateral trade agreements—such as the North American Free Trade Agreement (NAFTA)—has been a consistent rhetorical theme for the President during his campaign and his first year in office. Still, the economy that the President is determined to revive does not exist in the way he envisions it, with most of the changes due to technological advances and not unfair globalization. It is important to note the U.S. has for decades crafted international trade agreements that help the U.S. economy specifically, while also increasing global trade. In fact, just before he tweeted his new stance on tariffs and taxes to protect steel and aluminum industries, the President retweeted positive news about the U.S. economy, from high consumer confidence to low unemployment, as well as a booming manufacturing sector.

The President stated that the U.S. steel industry is ‘in bad shape’ and then added the warning that ‘If you don’t have steel, you don’t have a country.’ The administration’s earlier protectionist measures to prop up the coal industry—at a time when western countries are moving away from coal—by increasing tariffs on imported solar panels put pressure on far more jobs in the renewable energy industries than the dwindling jobs in the coal industry. The tariffs on steel and aluminum are even more skewed towards protecting a shrinking number of jobs at the expense of the many more people working in industries that will be affected by the resulting rising costs of steel and aluminum. According to the National Tooling and Machining Association and the Precision Metalforming Association, 6.5 million people work in U.S. industries using steel and aluminum, from car makers to beer bottlers, while only approximately 80,000 work directly in the U.S. domestic steel industry. It remains to be seen how countries will react to the proposed tariffs, though U.S. allies have already denounced them.

The White House is basing its tariff decision not on economic considerations but on national security grounds, using Section 232 of the Trade Expansion Act of 1962. This move would not be prohibited by the World Trade Organization (WTO), which makes an exception for issues of national security. Countries have not historically used this justification. The concern is that by doing so now, the U.S. will invite similar moves by other countries, gutting the WTO and throwing global trade into turmoil, resulting in a far more detrimental effect on U.S. national security than does the current framework.


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