Global stocks crumbled and recriminations quickly came flooding in from following U.S. President Donald Trump’s March 1 announcement that he intends to slap a 25 percent tariff on steel imports and 10 percent on aluminum.
To do so, Trump is invoking a little-used provision of the 1962 Trade Expansion Act, Section 232, which allows the president to impose unlimited tariffs and institute quotas if an investigation by the U.S. Commerce Department identifies a national security threat from imports of a particular product. Trade ministers from a number of key U.S. allies, including Canada, Germany, and the UK, bemoaned the decision, threatening retaliation to protect their industries, while leading financial analysts claimed that “the world stands on the brink of a trade war” and raised fears of a possible recession.
Both those panicking over the tariffs and those gleefully cheering Trump’s announcement — certain that the policy will bring jobs back to America’s decimated steel and aluminum industries — could use a healthy dose of realism. Tariffs can be an important tool to resolve the serious overcapacity issue plaguing China’s steel and aluminum markets, but only if properly designed.
In an ideal world, the Trump administration would have begun with targeted tariffs solely against China, as Chinese overproduction is widely acknowledged to be the real culprit behind the low prices and other issues plaguing the American aluminum and steel industries. China has dumped huge quantities of subsidized metal onto international markets around the globe, frequently through third countries. Thanks to cheap loans from the Chinese government, Chinese aluminum production has soared from 14 percent of the global total in 2001 to a staggering 54 percent in 2016.
The Obama administration tried numerous tactics to get the Chinese to shut down capacity, including suing China through the WTO for its aluminum subsidies, but with little success. If anything, it only made China more devious in its attempts to circumvent restrictions, especially thanks to the 15 percent export tax on primary aluminum. A 2017 increase in Chinese exports in semi-fabricated, or secondary, aluminum is suspected to be yet another ruse to pour more excess capacity onto global markets: observers have questioned whether the metal was actually deliberately misclassified raw product, processed just enough to avoid the export tax.
This failure to convince China to reduce its capacity and slash its anti-competitive subsidies gradually built an appetite for more severe measures such as tariffs. This is a belief that seemed to be shared at some of the highest levels of government. In a memo to Secretary of Commerce Wilbur Ross, Secretary of Defense James Mattis emphasized the importance of reinforcing to pivotal American allies that any tariffs or other restrictions are “focused on correcting Chinese overproduction.”
Despite Mattis’ warning, the Trump administration clearly has other considerations at hand, and is envisioning far broader measures. Trump has yet to reveal the details of the measures he is taking, most importantly whether he will grant any countries exemptions from the proposed tariffs. In Thursday’s meeting, Trump insisted in bombastic style that he would like the tariffs to apply equally to all countries, arguing that it was impossible to propose an exemption for any one country without expecting all others to want similar treatment. The White House also raised the concerning possibility that non-exempt countries could circumvent the tariffs by shipping their products through exempted countries.
Some of the United States’ biggest trading partners are already heavily pushing back against the idea of applying the tariffs equally to all countries. Canadian officials are still holding out hope that they will receive an exemption due to their massive trade with the United States — the country is the biggest exporter of both steel and aluminum to its southern neighbor — but have warned that they will take retaliatory measures if the tariffs apply to them. Jean-Claude Juncker, the president of the European Commission, also took an unusually vehement stance against the new duties, reminding Trump of the EU’s longstanding security cooperation with the United States, declaring that the EU would “not sit idly while our industry is hit with unfair measures” and threatening to take the issue before the World Trade Organization.
Despite this tremendous pressure by vital allies, obtaining exceptions would actually be counterproductive and would simply benefit whichever importers were exempted, rather than the U.S. companies and workers the policy is supposed to protect. Other than the fact that non-exempt countries could launder their aluminum and steel, a two-speed tariff system would incur other problems.
Even if all of these U.S. smelters which were made redundant reopened, and even if the most likely country to win an exclusion, Canada, supplied all of its production of primary aluminum to the United States, the United States would still not have enough primary aluminum to supply its consumers, and would have to purchase it from other countries, tariff included. This in turn could have devastating effects on downstream industries, while providing a serious boon to smelters north of the Canadian border.
Trump has often cited other countries’ dumping as the reason why many American aluminum smelters have closed down. However, there were additional reasons for these closures, most notably the high cost of American electricity vis-à-vis other countries. Primary aluminum production is an incredibly energy-intensive process — the energy bill represents between 20 percent and 40 percent of the cost of producing primary aluminum production. These high electricity costs made American plants fundamentally uncompetitive, and caused the U.S. sector to move downstream: downstream industries currently make up 97 percent of aluminum sector jobs in the United States.
Targeted tariffs are not necessarily an unreasonable solution to the problem of Chinese steel and aluminum dumping. They should not be seen as a cure-all, but should be part of a comprehensive plan for tackling metal overcapacity. This holistic strategy should include bilateral negotiations with the Chinese government to persuade them to reduce the unsustainable subsidies they have put in place. But unless these measures are judiciously crafted, they will end up doing more harm than good.
Anthony Kleven is an economic risk consultant. The views expressed here are his own.