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Trump’s Steel Tariffs

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March 26, 2018 — Caijing Magazine asked me the following questions about US steel tariffs on 3/14. Do you see trade wars coming or they are already here? Will it be easy for the US to win trade wars as President Trump said? Answer: I see trade wars lurking around the corner.  They are not yet here for sure.  But recent developments are very worrying. Of course it will not be easy for the US to win a trade war.  This is one of the most foolish things Trump has said (and he has said a lot of foolish things that can compete for that description).  The usual outcome of a trade war is that all participating countries lose. President Trump’s steel and aluminum tariff plan is supposed to target China, but China is not the biggest exporter to the US market and American allies including Japan,

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March 26, 2018Caijing Magazine asked me the following questions about US steel tariffs on 3/14.

  1. Do you see trade wars coming or they are already here? Will it be easy for the US to win trade wars as President Trump said?

Answer: I see trade wars lurking around the corner.  They are not yet here for sure.  But recent developments are very worrying.

Of course it will not be easy for the US to win a trade war.  This is one of the most foolish things Trump has said (and he has said a lot of foolish things that can compete for that description).  The usual outcome of a trade war is that all participating countries lose.

  1. President Trump’s steel and aluminum tariff plan is supposed to target China, but China is not the biggest exporter to the US market and American allies including Japan, South Korea and EU will be affected, why?

Answer:  It is an article of faith for Trump that heavy US manufacturing needs protection from imports. He was probably disappointed when told that China does not export a big share of steel to the US, but he did not allow that to stop him.

To be honest, one could make the economic argument that there is, roughly speaking, a global market in internationally traded steel and that China’s tremendous excess capacity in steel has pushed down prices everywhere.  In that sense it does not matter if China exports steel to Canada and Canada exports (other) steel to the United States, or if it goes directly. The effect is similar.

  1. The 232 section of the Trade Expansion of 1962 is not often used. Is national security a good reason to justify Trump’s decision?

Answer:  No, national security is not a good reason (not even if “national security” is defined broadly to include economic security).  The overwhelming majority of steel consumed in the US is either produced in the US or imported from friendly allies.  The invoking of Section 232 is a flimsy pretext. Among the many worrisome possibilities is that other countries might start invoking national security justifications for trade barriers.

Indeed, if I were an impacted trading partner, I might invoke national security when retaliating against imports of, say, bourbon or soybeans.  The rationale would be as silly as the US invoking Section 232 as grounds against steel imports, but under WTO rules partners would not have to wait for a WTO ruling.  (And imports from the US do constitute a high fraction of EU consumption of bourbon and Chinese consumption of soy.)  When the WTO eventually ruled on both sides’ measures, it could strike down both or neither;  either of those two outcomes would be less damaging with regard to the precedent than where we are now.

  1. Is imposing tariffs a good way to reduce trade deficit?

Answer: The main reason the US has a substantial and growing trade deficit is that it has a large and growing deficit in the budget and in national saving – exacerbated by the big tax cut that Trump and Republican Congress passed in December. Tariffs are not a good way to address this problem.

  1. As Canada and Mexico will be exempted, will it give America more leverage in the renegotiation of NAFTA?

I doubt if this will give the US much more leverage in negotiating with Canada and Mexico.  Trump wants things that are impossible for our partners to agree to (like “eliminate the bilateral deficit” or “pay for the border wall.”)   I don’t see him getting these things, with or without the threat of steel tariffs.

  1. The WTO gives countries wide leeway to determine their national security interests, how do you see the chance that the WTO affirms Trump’s argument? If the WTO rules against Trump’s decision, will he withdraw the US from the WTO?

Answer:   These are other very worrisome possibilities.  It would be bad either way.  It would be bad if a precedent were established that any country can impose any tariffs it wants by saying the magic words “national security.”   It would also be bad if the WTO ruled against the US and Trump was able to use that to rally public opinion against the WTO. But I would guess that he won’t be able to do that, because support for trade among the American public is actually quite strong and the steel tariff case is so egregious.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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