What do the New U.S. Import Tariffs Mean for Global Trade?

On March 1st 2018, the U.S. administration announced that it would impose new import tariffs on steel (25 percent) and aluminum (10 percent), invoking Section 232 of the 1962 Trade Expansion Act. The tariffs took effect on March 23rd 2018. A decision of this nature, considering the complex and volatile globalized trading market, could impact economic stability and trade relationships. Raising tariffs might have adverse impacts on the economies of trading partners with whom the U.S. currently has close relationships. As a result, affected trading partners are likely to, in their best interest, identify potential ways to retaliate the U.S. administration’s actions. Depending on the severity of the retaliation acts, a trade war may be initiated. Whether or not the measure was carefully planned to address overproduction of these raw materials, it could lead to increased global uncertainty about U.S. trade policy and the alienation of American trading partners.

The import tariffs are likely to be beneficial for home-based producers of steel and aluminum, as well as for cities and states that collect considerable taxes from these industries. However, the new tariffs will also lead to higher costs for American industries that rely on importing these raw materials. A CEO of a steel mill in Pennsylvania stated that, “if his company’s customers refuse to accept a 25 percent hike as a result of the tariff…nearly 1,200 workers could eventually lose their jobs.” But steel mills are not the only industry that would be affected by higher import tariffs. The tariffs will also impact other industries and local economies in which manufacturing facilities generate employment and contribute to the tax base. Some of the industries that rely on steel and aluminum products include auto and aircraft manufacturing, beverage industries (mainly beer and soda), oil and petrochemicals (drillers), and infrastructure (construction). Additionally, some companies might have to deal with limited access to export markets due to retaliatory measures. One president of a steel company who opposes the measure stated that their, “operation [in the U.S.] depends on…being able to sell…products around the world.”

Affected trading partners might pursue strong and proportionate responses to retaliate against the U.S. measures. For instance, nations could coordinate an effort to bring a case against the U.S. to the World Trade Organization (WTO). However, this response would be slow and time-consuming. Challenging the use of Section 232, which refers to National Security, is a faster way to take action in order to protect national markets. Nations could claim that the U.S.’s motivation is to enact an economic safeguard measure in disguise, rather than anything to do with National Security. Under WTO rules, nations would be entitled to make immediate use of the WTO safeguard agreement to rebalance benefits that have been given to the U.S. in the past. An affected nation would then be able to implement measures that match the economic loss suffered due to increased tariffs. In fact, past U.S. administrations (G. W. Bush in 2002 and Obama in 2016) applied steel tariffs that were subsequently withdrawn because the WTO ruled against them. Finally, countries could propose a list of U.S. products to impose import tariffs on. The European Union (EU) already has such a list of products, which includes bourbon, blue jeans, and motorcycles.

Though it is too early to say with confidence that this policy change will lead to a trade war, these two words were all over the headlines during the first week of March. A trade war is a situation in which countries create trade barriers, such as tariffs or quotas, in order to hinder each other’s trade. Whether or not a full trade war occurs, several consequences are likely to result from these tariffs. Firstly, the measure is likely to divert 18 million tons of steel into other markets. Secondly, the measure may impose trade losses on trading partners. One important trading partner that could potentially be affected by this measure is the EU, a close ally, that could lose up to $2.6 billion per year. As a result of the economic harm caused by U.S. tariffs, it would be reasonable to expect trade partners to put in place their own safeguard measures to protect their economies. Some financial analysts argue that the amounts of aluminum and steel diverted into other markets would be too small to have an impact on prices. They suggest that the unilateral decision made by the U.S. government plays an influential role, as it increases uncertainty about trade markets. The U.S.’s unilateral decision could also be damaging to the entire trade rule system and raise further uncertainty about U.S. trade policy.

The root cause of the problem is the global overcapacity of steel and aluminum, which has been sponsored by massive state subsidies. Although increased U.S. import tariffs would address this issue, a better path could have been a multilateral approach in compliance with WTO’s rules; this method would have avoided antagonizing trade partners. Since overproduction of steel and aluminum is a global problem, the solution lies in international cooperation. On March 13th, the Organization for Economic Cooperation and Development (OECD) recommended that, “Governments avoid escalation and rely on global solutions.” The overproduction in the steel and aluminum sectors has been a concern that has led to the creation of a mechanism and six guiding principles included by the OECD Global Forum on Steel Excess Capacity. However, the principles and institutions of international cooperation are not a panacea and efforts to operate within its frameworks are not a guarantor that states will find a mutually agreeable solution. It is important to consider the willingness of nations that provide steel and aluminum subsidies to accept the norms of the WTO. Equally, the new import tariffs raise questions about whether or not the WTO, or any other international organization, is fully equipped to resolve trade tensions between major powers.

Since the announcement at the beginning of March, there have been several developments in relation to the import tariffs. The U.S. administration decided to exclude Canada and Mexico from the tariffs. Additionally, as of March 22nd, the Trump Administration has decided to give a temporary exemption for the EU, Brazil, South Korea, and others. This announcement was followed by an immediate response from China, which plans to pursue retaliatory measures. By the end of the afternoon, the Dow had the 5th largest drop in the Dow history, which was thought to be caused primarily by trade war fears.

 

Image courtesy of Flickr. Originally published by S&S on March 27, 2018.

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