Blog Post

Are we steel friends?

The U.S. administration is considering to impose tariffs on steel (25%) and aluminium (10%), based on a national security argument. We review economists’ views about this major shift in U.S.’ trade policy.

By: Date: March 12, 2018 Topic: Global Economics & Governance

Chad Brown thinks that this kind of protection would have tremendous and widespread economic and institutional repercussions, for several reasons. First, this would cut a significant amount of imports. New tariffs would probably boost costs for US automakers, can manufacturers, infrastructure projects, and even defence contractors. Second, the US has not triggered protection under the national security law in more than 30 years – President Reagan last imposed restrictions under this law in 1986. Imposing steel and aluminium tariffs now, may set off more claims that trade poses other threats to national security. Third, Brown thinks that the investigative process under this law was not transparent: the public was not informed as to what “steel” and “aluminium” products were being investigated until the result was released. Brown points out that this process is much less transparent than the more frequently used trade laws of antidumping, countervailing duties and safeguards. Fourth, Brown argues that the law awards the President incredible discretion to unilaterally decide on the size and form of the trade restriction as well as on the duration. Fifth, even though the World Trade Organization (WTO) allows countries to impose restrictions when there are exigent threats to national security, triggering the excuse poses a fundamental threat to the rules-based trading system.

Uri Dadush examines possible EU responses. Trump’s intended measure raises four issues for the EU: the effect on European industry; how to deter Trump’s broader protectionist thrust; how to use the WTO Dispute System in this case; and, how to prepare for the contingency of a post-WTO or truncated-WTO world. Dadush thinks that the effect on the European steel Industry is likely to be modest and increased protection of European steel is likely to be counterproductive. The EU should retaliate vigorously and quickly to deter the Administration’s protectionism, even if the legality of the EU’s retaliation will be challenged for not observing due process. The EU should challenge the invocation of the national security exception by the United States at the WTO and it should prepare for the contingency of a post-WTO or a truncated-WTO world. (listen also this podcast where Uri Dadush is in conversation with Andre Sapir on the topic).

Timothy Taylor at Conversable Economist as a good and long background on both steel and aluminium industry in the US. He points out that the argument that it might sometimes be necessary to limit imports because of national security has a “venerable history”, back to Adam Smith. But if the national security concerns are legitimate, then the response “slap on tariffs, help domestic industry earn higher profits, and hope that domestic industry uses those profits to build up capacity and specialized products and R&D” seems like a remarkably sloppy and unserious way to address them. Waving the words “national security” should not exempt anyone from an actual consideration of actual costs, benefits, and alternative strategies. There is zero question in the mind of any economist that import tariffs will offer short-run benefits to the domestic steel and aluminium industries. Whether it benefits the country overall – either in the military or the economic sense of “national security” – is considerably more dubious. The inevitable trade retaliation from other countries will only worsen these tradeoffs.

Jared Bernstein says he’s certain the tariffs will do more harm than good, but argues that this does not mean there isn’t a problem. He cites a Washington Post article describing impressive productivity gains in steel production and asks why the US, if it is so productive in steel, has persistent net imbalances in that sector. It could be that other countries’ productivity gains in steel production have been greater, or their labor costs are lower, but at least in broad manufacturing, that does not seem to be the case as US ULCs are, on a dollar basis, below that of most trading partners, both in levels and growth rates. Bernstein thinks that at the heart of the problem may be China’s out-sized contribution to excess global capacity, which neutralizes the productivity gains.

Josh Bivens argues that the blowback to the tariff idea is overblown, and seems to constitute reflexive anti-Trump sentiment rather than careful economic reasoning. First, these are temporary relief for specific sectors facing a specific problem. America has taken steps like this before, and did not slide down any slippery slope to autarky. Bivens thinks that the proposed tariffs can provide a countervailing force against foreign subsidies and protect American metal producers until a comprehensive solution is found. The real problem with the tariffs is that they’re an ad hoc and insufficient ameliorative fix for continuing policy failures that have decimated American manufacturing employment for almost two decades. The two main failures have been macroeconomic policy that has accepted long and slow post-recession recoveries, and exchange rate policies that have allowed the value of the dollar to stick at levels too high to balance (or even nearly balance) manufacturing trade flows.

Chad Brown also has a primer on how WTO retaliation work. Under WTO rules, a country could retaliate against an action such as the US tariffs, if there is a legal finding that the national security rationale is baseless. WTO retaliation is not punitive. Under the principle of reciprocity, the WTO would limit the amount “equivalent to the level of nullification and impairment” that resulted from Trump’s policies. Using information reported from the Trump administration’s own models, Brown estimates that Trump’s steel and aluminium tariffs would impose trade losses on partners equal to $14.2 billion per year, an amount establishing the collective permissible retaliation. The countries hit the hardest by Trump’s tariffs are Canada ($3.2 billion), the European Union ($2.6 billion), South Korea ($1.1 billion) and Mexico ($1.0 billion).

Source: Chad Brown

Noah Smith thinks that the tariffs are generally not a good way to promote domestic industry. They encourage American producers to focus on the captive local market instead of figuring out how to prevail in the rough-and-tumble of global competition. Forcing American consumers to use the domestic-made product might eventually result in American steel and aluminium becoming bywords for low quality and there’s also the danger that making metals more expensive will hurt a lot more U.S. manufacturers than it helps (see figure below). Defenders of the tariffs argue that steel and aluminium are important for national defence, but military shipbuilders will be hurt by higher metals prices, as will makers of tanks, planes, guns and other crucial defence equipment. Nor will the tariffs bring back good jobs at steel and aluminium factories: since 1990, production of metals in the U.S. has held roughly constant, but the number of people employed in the industry has fallen steadily, due to technology. So Smith thinks that the metals tariffs look likely to be a self-inflicted wound for the U.S.

Source: Noah Smith

Jeffrey Sachs argues this would be the first shot in a delusional and destructive trade war. Whatever US steel producers might gain from a trade war would be offset by the losses to steel users and consumers, plus the social costs of protecting uncompetitive jobs. But the blow to the stock market reflects the possibility of something far more dire: a downward spiral to a global trade war in which all countries, including the US, will be deep losers. We have been there before: The trade wars of the early 1930s helped to trigger, then deepen and prolong, the Great Depression. Sachs believes these actions are based on three primitive fallacies. First, Trump thinks that America runs trade deficits with countries like China and Germany because the US is being swindled by them. The real reason is that the US saves too little and consumes too much. Second, Trump thinks that trade barriers will protect the US, but while these measures might temporarily protect US Steel, they will not protect US society. Third, Trump believes that US trade barriers will crush China and sustain American global economic and military dominance, but China and Europe will surely retaliate.

Martin Wolf writes on the Financial Times that these tariffs are not that important in themselves, but the rationale used to justify them, their proposed level and duration, the willingness to target close allies and the president’s statement that “trade wars are good and easy to win” presage more protectionism. This action is likely to be the beginning of the end of the rules-governed multilateral trading order that the US itself created. A crucial point is that this action is not about China, which accounts for less than 1 percent of US steel imports. Its victims are friends and allies: Brazil, Canada, the EU, Japan and South Korea. Nor is it a measure taken against some form of unfair trade. This is a purely protectionist policy aimed at saving old industries. Yet, even on these terms, the rationale is feeble: US steel and aluminium production has been flat for years. If this action really makes sense to Mr Trump, what might not?

J. Bradford Delong thinks that in the end, American consumers will pay for the tariffs. Such broad protectionist measures will affect every sector of US manufacturing in one way or another, and manufacturers certainly will not eat the full costs of higher-priced steel and aluminium inputs. So, Trump has essentially proposed a new tax on US consumers and export industries, the costs of which will be borne largely by his own supporters in American heartland and Rust Belt.

Dani Rodrik says that many commentators have overreacted to the possibility of tariffs, predicting a “trade war” and worse, but the reality is that Trump’s trade measures to date amount to small potatoes. In particular, they pale in comparison to the scale and scope of the protectionist policies of President Ronald Reagan’s administration in the 1980s. Trump’s policies violate the spirit, if not the letter, of today’s trade agreements, Reagan’s trade restrictions exploited loopholes in existing arrangements. Even though their overall impact remains limited, Trump’s trade restrictions have more of a unilateral, in-your-face quality. Another contrast with the Reagan-era measures is that we are living in a more advanced stage of globalization, and the problems that have accompanied it are greater and the forces of nationalism and nativism are probably more powerful than at any time since the end of World War II. While Trump’s policies purportedly aim to restore fairness in global trade, they exacerbate rather than ameliorate these problems. Such protectionism is a gimmick, not a serious agenda for trade reform.


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