BY IRENE EZRAN
Last week, President Trump announced that he would delay imposing steel and aluminum tariffs for three major U.S. allies: the European Union, Canada, and Mexico. Despite the temporary tariff exemption, several leaders took a firm stance against the United States, and the EU stated that it would not “negotiate under threat.” This political backlash has raised the stakes for the already turbulent U.S. trade policy, and many economists are becoming increasingly wary of a looming trade war that could significantly impact producers and consumers across the globe.
In early March, President Trump announced that he would impose a 25 percent tariff on steel and a 10 percent tariff on aluminum imports. However, Trump exempted certain allies from the tariffs by extending them a grace period until May 1st to negotiate bilateral agreements. The White House quickly reached an agreement with South Korea, and it recently negotiated with Australia, Argentina, and Brazil to limit their steel and aluminum exports to the United States. A few hours before the May 1st deadline, the Trump administration decided to delay for a second time the placement of tariffs on the EU, Canada, and Mexico.
President Trump repeatedly uses the threat of tariffs as leverage in negotiations with foreign nations to obtain better terms of trade for American producers. Yet Jean-Claude Juncker, the President of the EU Commission, stated “[the threat of tariffs] should not happen between allies” and argued that tariff exemptions for the EU should be “unconditional and permanent.” The EU warned of a trans-Atlantic trade war if Trump implements tariffs at the next May 31st deadline.
Due to the significant negative repercussions of trade wars, many in the United States and abroad wonder: why is Trump imposing tariffs, and who will likely be affected by economic warfare?
On the campaign trail, Trump was extremely vocal in criticizing the U.S. trade deficit with the rest of the world. In 2017, the United States had a global trade deficit of $566 billion, $375 billion of which was due to a trade deficit with China. Trump views the trade deficit as a symbol of weakness in the U.S. economic policy, and he believes that imposing tariffs will decrease the United States’ trade deficit, since imports will become more costly.
However, most economists argue that a trade deficit is not inherently bad. A trade imbalance can be caused by a variety of macroeconomic factors such as growth, savings, investment rates, and the relative value of currencies. During the 2007-2009 Great Recession, the U.S. trade deficit decreased despite the fact that the economy plummeted, since the demand for both domestic and foreign goods decreased. Thus, trade balances are not a good indicator of economic health.
Despite the controversy surrounding the U.S. trade deficit, according to Joseph E. Gagnon, a Senior Fellow at the Peterson Institute for International Economics, “there’s no evidence that high tariffs reduce your trade deficit.” Instead, imposing tariffs is likely to provoke other countries to retaliate with tariffs on American-made products.
Trump also argues that importing steel and aluminum stifles American job growth. For example, the Chinese government unfairly subsidizes steel and aluminum production, leading China to dump low-priced steel and aluminum onto the world market. Trump claims that China’s actions have caused U.S. smelters to close, resulting in the loss of American jobs. However, China only accounts for two percent of U.S. steel imports. In contrast, major steel exporters to the United States (Canada, Brazil, South Korea, and Mexico) have been temporarily exempt from the steel tariff.
According to George Mason University economist Daniel Griswold, the decline in steel industry employment in the United States is not caused by imports. Since the 1980s, 80 percent of U.S. steel consumption has been produced domestically, so imports only account for roughly 20 percent of consumption. Griswold explains that the increase in automation in steel production, combined with the decrease in demand for steel in an information-driven economy have caused the decline in U.S. jobs in this sector. Therefore, imposing a tariff on foreign-produced steel is unlikely to bring back American jobs.
Furthermore, the steel and aluminum tariffs have the potential to jeopardize jobs in industries in the United States that depend on steel and aluminum as inputs. The tariffs on imports will increase the cost of production for American manufacturers, which could lead to massive industry layoffs.
In addition, Trump imposed tariffs on steel and aluminum because he views the importation of these products as a national security concern. In January 2018, the Department of Commerce released a report confirming Trump’s claim that imports adversely impact the steel and aluminum industries, and Secretary of Commerce Wilbur Ross suggested imposing the tariffs. The World Trade Organization rules specify tariffs as lawful only in the case of a national security threat. Yet, prominent leaders of the America defense industry argue that on the contrary, increased costs for the aerospace and defense manufacturers and dampened economic growth from a trade war are much more substantial threats to national security than the imports themselves. According to Chief Executive of the Aerospace Industries Association, Eric Fanning, “economic security is an important part of national security.”
These factors have led Trump’s economic advisers and Congressman from both sides of the aisle to warn Trump of the potential repercussions of imposing tariffs. Chief Economic Adviser Gary Cohn strongly objected to the tariffs and announced his resignation days after Trump disregarded his advice. Cohn added to a long list of White House advisers who felt that their expertise were ignored by Trump’s rash decision-making.
In one of Trump’s tweets, he claimed that trade wars are “easy to win,” since the United States is already “losing many billions of dollars on trade.” Yet, perhaps Trump and some of his economic advisors did not consider the escalatory nature of trade wars and the potential impact on both producers and consumers.
Shortly after the Trump’s tariff announcement, the EU planned retaliatory tariffs, targeting products from “politically sensitive Republican-run states.” These products include Bourbon whiskey produced in Senate Majority Leader Mitch McConnell’s home state of Kentucky, Harley-Davidsons manufactured in Speaker of the House Paul Ryan’s home state of Wisconsin, and orange juice produced in the swing state of Florida.
China has also taken retaliatory measures in response to the U.S.-imposed tariffs. Since China exports more to the U.S. than it imports from the U.S., in theory it has more to lose from a trade war with tariffs imposed on both sides. However, Chinese President Xi Jinping is confident that he can win a trade war against the United States. Xi Jinping’s authoritarian grip on China’s state-owned media can shield him from domestic criticism on his trade policy, a luxury that Trump does not have. In addition, the Chinese government’s tight economic control enables it to order banks to provide financial support to Chinese industries that could collapse due to the American tariffs. Moreover, in April 2018, China vowed to strike back with tariffs on $50 billion worth of American goods produced in the “farm belt” – a major part of Trump’s voter base. The fear of a trade war with China has caused stock indexes to drop in the United States.
In addition to substantially harming producers, a trade war can have a significant impact on consumers around the world. In April 2018, Trump announced tariffs on 1,300 electronics and appliances from China in protest of China’s lack of respect for intellectual property rights. This will raise prices of consumer electronics exported to the United States, making these goods unaffordable to many Americans. Moreover, these tariffs may create unintended consequences in global production chains, leading to higher prices for consumers in other sectors.
Most importantly, the high degree of uncertainty and volatility in Trump’s trade policies may incentivize countries to exclude the United States from international trade agreements. After years of negotiating the Trans-Pacific Partnership (TPP), the largest regional trade deal in history, Trump unilaterally pulled out of the agreement. Recently, he announced that he is considering rejoining the TPP. Canada and Mexico have also been on edge, since Trump has repeatedly threatened to end the North American Free Trade Agreement (NAFTA). This, among other reasons, has led President Enrique Peña Nieto of Mexico to update a trade agreement between Mexico and the EU last week, lowering tariffs and establishing rules for protecting investments, according to the Washington Post.
The United States has a lot to lose from the rapprochement of its allies and its potential exclusion from the world economic stage. Historically, protectionism and economic isolation have harmed the United States and led to a long-term decrease in GDP and a rise in unemployment.
With the growing importance of international trade, a full-blown trade war would have substantial global repercussions. While Trump is attempting to regain economic clout and bring back blue-collar jobs for Americans, imposing tariffs on steel and aluminum has the potential to harm his voter base. Trump will likely face the political consequences of his rash economic policies in the midterm elections in November of this year.