How high a price will the global economy pay for Trump’s tariffs?
Shanker Singham and Kay Neufeld // 10 April 2018
In a last-minute move, President Trump granted several key allies exemptions from the steel and aluminium tariffs that came into effect recently. Apart from the Nafta countries Canada and Mexico, the US added EU member states, Brazil, Argentina, Australia and South Korea to the list of countries at least temporarily exempt from the tariffs.
This means that over two thirds of steel imports by value are now exempt from the tariffs. The move reveals Mr Trump’s true intentions: intimidating countries by threatening tariffs in order to get them to the negotiating table. His surprise announcements are part of a strategy which aims to force countries into compliance: do as the US says, or else.
President Trump’s tariffs on steel and aluminium under the provisions of section 232 of the Trade Act are a harbinger of a new American trade policy, which no longer sees itself bound by the norms of traditional international trade policy. Highly protectionist measures are once again popular in the highest circles of the US administration as Trump seems determined on delivering on his promise of America first.
The change in approach will be felt on the ground. More firms will be drawn into various trade remedy investigations in the US, whether classic anti-dumping investigations or safeguard actions (under section 201) or the more recently used national security measures (under section 232). The US has long complained of market distortions in other countries such as China, but has not succeeded in making progress in their reduction. Through US Trade Representative Robert Lighthizer the President is projecting a US policy that prioritises action over those perceived injustices.
In general, the US (like all other WTO members) is able to invoke anti-dumping as well as countervailing duties on certain imports. Antidumping legislation has a long-standing tradition in the US and covers exports that are deemed to be sold in the US at artificially low prices below the “normal value”.
A recent example of such anti-dumping measures is the US-Canadian dispute regarding uncoated groundwood paper used in newsprint. On 13 March, the US Commerce Department said it came to the preliminary findings that Canadian exports of this material to the US market were sold at dumping prices and imposed preliminary duties of up to 22.2 per cent.
The second type of trade defense mechanisms covers the so-called countervailing duties on goods that are suspected to benefit from subsidies in the exporting country. A subsidy can take many forms, from direct grants to loans, equity investments, tax credits or the provision of discounted goods or services.
Currently, the US maintains 519 anti-dumping/countervailing duty orders against 49 nations. 43 per cent of those are concerning steel-related products. Between January 2017 and March 2018, the commerce department has launched 102 new investigations, almost twice as much as in the same period 12 months earlier.
There are two possible landing zones for the US administration on trade policy. The first is that it settles on the strategy we have seen in recent weeks – the imposition of significant tariffs as a result of a trade remedy proceedings. The second is a more nuanced dealing with market distortions in third countries. This approach would involve the threat of action to bring countries to the table so that their own market distorting practices can be dealt with. The more nuanced approach was in evidence at the WTO ministerial conference in Argentina in December, 2017, when the US, EU and Japan all called for a reduction of market distortions in third country markets.
Were the former approach of high tariffs almost indiscriminately applied against a number of key trading partners it would likely have a number of negative effects for the US economy. Steel and aluminium imports covered by the proposed tariffs amounted to $48 billion in 2017, around 2 per cent of total US imports. Among the states that are disproportionately affected are Missouri where steel and aluminium account for 7.4 per cent of imports, as well as Louisiana and Connecticut (7.3 per cent and 6.4 per cent).
Businesses that depend on steel and aluminium imports will have to pay higher prices for these inputs. That reduces their profitability and might put some firms out of business. The important question will be how other countries retaliate and, in turn, how the Trump administration reacts to this retaliation. A large-scale trade war still cannot be ruled out with potentially significant costs. A recent analysis has shown that world GDP could be 0.5 per cent smaller by 2020 if the US implemented a 10 per cent levy on imports and the rest of the world responded in the same way. That amounts to a $470 billion reduction in GDP. The effects of a high-tariff regime not only decrease trade between countries in absolute values, it would further make consumers poorer and stoke inflation. This would put further pressure on central banks to raise interest rates, which remain artificially low.
If, as seems likely, there is retaliation for US policy and indeed many countries find it to be WTO violative, a whole range of other products will be impacted. It is likely that other countries will target American products that are politically sensitive in order in increase the pressure on the US government to lower the barriers. Typically this includes citrus from Florida, and other high profile and iconic US products like bourbon and jeans. The purpose of a retaliation list is to convince the affected industry sector to put pressure on the US administration to grant it exemptions or to dilute the policy in some other way.
The current steel and aluminium action is akin to closing the stable door after the horse has bolted. Most Chinese steel comes in under a tariff as a result of previous trade remedy cases. Indeed, more than half of all US steel imports already have a tariff applied through trade remedy actions. For this reason, very little Chinese steel will be affected by the Section 232 action. While EU, South Korean and Canadian steel are all exempt at the moment, Trump’s erratic behavior mean this privilege could be withdrawn at any time.
Firms must adapt to this new reality. They must be ready for tariffs and retaliatory tariffs. Successful firms in this new trade policy environment will be flexible enough to adapt, and also must be knowledgeable enough about trade policy that they can anticipate future trends.
This is a more dangerous world, but it is still a world that can be managed. If the Trump administration is able to strong arm a reduction in anti-competitive market distortions in China and other markets, it might even be a better one. But it is playing a high-stakes game in pursuit of that objective.
This article appeared first on CapX.