“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!”
U.S. President Donald Trump’s March 2 tweet followed his shock announcement of 25 percent tariffs on imported steel and 10 percent on aluminum for “a long period of time,” on the grounds of national security as well as protecting U.S. industry.
However, while U.S. steel prices surged, the protectionist measure saw stockmarkets sell off worldwide amid fears of retaliation by major trading partners, who reacted negatively.
Canada, the biggest overseas supplier of steel and aluminum to the United States, described the tariffs as “absolutely unacceptable.”
“It is entirely inappropriate to view any trade with Canada as a national security threat to the United States,” Canadian Foreign Minister Chrystia Freeland said.
The European Union threatened reciprocal 25 percent tariffs on U.S. imports, as well as on “iconic” U.S. products such as Harley-Davidson motorcycles, bourbon, and blue jeans.
“We can also do stupid,” European Commission President Jean-Claude Juncker said.
Chinese industry officials also described the measure as “stupid” and overturning the international trade order.
While Beijing was more circumspect, it did warn of the potential for countermeasures.
“China does not want to fight a trade war with the United States, but we absolutely will not sit by and watch as China’s interests are damaged,” Chinese Vice Foreign Minister Zhang Yesui said.
Japan also expressed its concerns, with Japanese Trade Minister Hiroshige Seko saying: “I told U.S. Commerce Secretary [Wilbur] Ross that steep tariffs would affect the U.S. economy and employment. Japanese steel products are superior in quality and important for Japanese firms with production bases in the U.S., as well as U.S. manufacturers.”
He urged Ross to exclude Japanese products from the tariffs, with Australia’s government also seeking an exemption from its key security ally.
Yet Ross said Friday the tariffs would be imposed on “all countries and products,” despite recent lobbying by the Australian prime minister and other officials in Washington.
Trump’s latest move follows January’s imposition of steep tariffs on U.S imports of solar panels and washing machines, a measure deemed aimed at Asian manufacturers but with few exemptions.
Australian Trade Minister Steven Ciobo said the new U.S. tariffs could even risk a global downturn.
“If we see a breakout of action and reaction from major economies, the only thing that will arise from that will be a slowdown in economic growth and over time, if that got bad enough, we could see for example a recession – and we know the consequent impact of that,” he said.
A full-blown trade war could cost Australia alone 20,000 jobs and slash $5 billion off national income, according to modelling by Deloitte Access Economics.
Trump responded to the European Union’s reaction by threatening even more tariffs on EU goods.
“If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a tax on their cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” he tweeted Saturday.
Ironically, the biggest foreign suppliers to the U.S. steel industry comprise U.S. partners Canada (16.7 percent), Brazil (13.2 percent), South Korea (9.7 percent), and Mexico (9.4 percent). Japan accounts for 4.9 percent, Germany 3.7 percent, and China just 2.9 percent.
“Steel is just a tiny input in the U.S. gross domestic product — which is why it’s so crazy. You mess up your entire trading system for an industry that has a total of 80,000 jobs,” Peterson Institute president Adam Posen told CNBC.
According to the U.S. broadcaster, 2015 census data showed 140,000 Americans employed in steel mills, contributing $36 billion to the economy. This compared to the 6.5 million jobs in steel-consuming industries such as car, plane, and consumer goods manufacturers, which collectively contribute around $1 trillion to U.S. GDP.
“It’s all about giving a handout to particular U.S. steel and aluminum producers. In national security terms, it makes no sense because it’s hitting our military allies like western Europe, South Korea, and Japan, and it doesn’t directly hit China. It’s a tax on consumers,” Posen added.
Wood Mackenzie senior manager He Ming said the new U.S. tariffs would not have much impact on Chinese steel exports or producers.
“The proposed protection measures will have more negative impact on steel imports from Canada, Mexico, and Brazil. South Korea, the largest source of U.S. imports from Asia, will be heavily hit if the U.S. imposes steel tariffs,” the analyst said, continuing:
South Korea has filed a complaint with the World Trade Organization over five steel anti-dumping duties and countervailing measures imposed by the U.S. If Trump chooses one of the proposed protection measures, it will trigger a wave of similar complaints. [South Korean] President Moon Jae-in has suggested so.
We think the steel tariffs will not solve the underlying problem of high cost of steelmaking in the U.S., which has forced steel end-users to search for cheaper imports. Its intention to protect employees in the steel and aluminum sectors will be offset by more job losses in the metal-intensive industries such as car manufacturers.
Capital Economics noted that steel and aluminum account for just 2 percent of world trade, resulting in a “minimal” direct impact on the global economy.
“But the fact that they are being justified under a flimsy pretext of national security increases the risks of retaliation,” said its chief global economist, Andrew Kenningham in a March 2 report.
The London-based consultancy said Trump’s move would likely face opposition from Congressional Republicans, U.S. corporations, and U.S. allies, which could yet cause a change of heart. If implemented, it sees the tariffs causing inflation to rise, with import prices increasing by around 0.5 percent, along with a small increase in U.S. steel production.
While other governments would likely respond, it said the real risk is that “this marks a turning point in U.S. trade policy, away from bluster and brinkmanship toward actual protectionist measures. We have consistently warned that this would become more likely as the mid-term and presidential elections approach. If so, President Trump may discover that, contrary to his tweet… there are rarely any winners from trade wars.”
Asia’s trade-dependent economies such as Singapore, Taiwan, and Vietnam are considered most exposed to the fallout, while South Korea could be damaged should the Trump administration withdraw from the Korea-U.S. free trade pact.
China is already studying U.S. imports of sorghum and is considering whether to restrict shipments of U.S. soybeans, measures that could hit Trump’s support in some farming states.
History suggests protectionist moves by Washington can badly backfire. Time magazine points to then U.S. President George W. Bush’s 2002 imposition of steel tariffs of up to 30 percent, which were aimed at protecting U.S. steelworkers and winning votes in the Rust Belt.
Yet following retaliation by the EU and complaints at the WTO, the global trade body ruled that the United States had violated international trade agreements, opening the door to retaliation. A year later, Bush reversed the tariffs, a “flip flop” that followed painful EU tariffs on products from a number of key U.S. swing states.
Far from “good and easy,” Trump might be about to repeat a painful period of U.S. economic history. Asia and the rest of the world will be hoping that someone in Washington has learned the lesson.