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Although President Trump mentioned several times that he supports free trade in theory, he also threatened to retaliate against nations that, in his mind, place unfair restrictions on the import of American goods. This line of thinking, of course, is the perfect formula for a trade war, which appears to be unfolding between the United States and China.
China announced yesterday new tariffs on 128 US import items, prompting the Dow Jones Industrial Average to drop 600 points, and related companies, such as consumer giant Tyson Foods, which has considerable exposure to the now-targeted pork industry, experienced even steeper drops.
Trump, who had been quiet on his promised protectionist public policy, decided a month ago to implement new tariffs on aluminum and steel, using national security as a pretext, and thereby ignoring the World Trade Organization.
Avoiding a trade with Latin America
But Trump has provided exemptions on the metal tariffs for key trading partners, including Mexico and Canada, while NAFTA is being revamped. He has also exempted Brazil, and Argentina, citing a special strategic relationship. While Argentina accounts for a small percentage of American steel and aluminum imports, the tariffs were concerning enough to president Mauricio Macri, that he dispatched Commerce Secretary Miguel Braun to argue Argentina’s case.
The Trump administration cited a “shared commitment to face the global excess of steel production capacity; reciprocal investment in our respective industrial bases and the strong economic integration between our countries”, as well as the regional threat posed by the rogue regime in Venezuela, as the rationale for giving Argentina a reprieve.
Brazil’s government had also questioned Trump’s statements, expressing concerns over the impact on the important steel trade between the two countries. The Ministry of Industry released an official statement arguing that, “the steel industries of both countries complement one another,” and noting that around 80% of Brazil’s exports are, in fact, finished steel products.
A government official, who spoke on condition of anonymity, said, “all suppliers will be affected and we do not know if the Brazilian companies will be able to export anymore to the United States or compete, with such tariffs.” Brazil, which is the second largest steel supplier to the US, had threatened retaliatory trade measures. For now, at least, Trump appears to have softened his trade stance with regard to his southern neighbors.
The US petroleum industry can also breathe a sigh of relief, at least temporarily, as Argentine steel tubing is a key component of their infrastructure. In 2017, Argentina exported USD $222 million of steel tubing, critical for the transport of oil and gas. American consumers would have likely born the brunt of higher fuel and heating oil costs, had the trade war not been averted.
Additionally, the free flow of Argentine and Brazilian steel and aluminum will help to control domestic construction costs, as well as prevent any potential retaliatory measures in oil and gas exploration for American companies.
For now, the metal tariffs are aimed squarely at China, but experts have called the policy into question.
Chinese reciprocity threatening hundreds of U.S. industries
Former assistant secretary of commerce for manufacturing and services Nicole Lamb-Hale argues that “National security has been kind of reserved, as it should be, for special circumstances…If you start using it like any other trade tool, it loses its bite. Other countries will say, ‘The United States did it, so we can do it, too’.”
Trump claims, under the Trade Expansion Act of 1962, the authority to restrict Chinese steel and aluminum based on threats to national security, but critics note that China is only the 11th largest supplier of steel to the US, and the fourth largest of aluminum. Undoubtedly, an authoritarian Communist government such as a China is a cause for concern if they are using trade policies to thwart our defense capabilities; yet the idea that aluminum and steel exports are a key component of planned Chinese global domination seems like a stretch.
The broad impact of a trade war should be most troubling to the American consumer. It is widely regarded by economists, particularly of a free-market orientation, that neither side wins in a trade war.
The 1930 Smoot-Hawley Tariff Act, for example, which raised tariffs on a draconian 20,000 import items in the US, is widely regarded as a key cause of the global Great Depression. Unsurprisingly, these kinds of protectionist barriers led to retaliation, reprisals, a massive trade war, and had a debilitating and destructive effect on the free flow of global commerce.
There is compelling evidence that protectionism does not work as planned. George W. Bush’s steel tariffs, for example, are credited by the Peterson Institute for International Economics with costing USD $400,000 per steel job saved. That hardly seems like a sensible in a cost-benefit analysis.
Comparative advantage works, and trade wars are to be avoided.
Libertarians and pro-free-traders are largely hoping that Trump will sit down with China to work out a reasonable solution that pushes us back from the brink of such a trade war.
Currently, the list of affected products is mainly agricultural in nature and includes pork, nuts, wine, and various fruits, as well as scrap metal. Thus far, the Chinese State Council, which regulates trade policies, has held off on extending the tariffs to the soybean market, however.
Essentially, this is a bone to Trump’s Rust Belt supporters and plays well with the kind of white working-class Midwestern voters that will be key to a Trump reelection in 2020.
While the trade war may play well with Trump’s base, it has certainly made business owners and investors nervous, as they worry that such trade restrictions will diminish business profits and slow economic growth.
The World Trade Organization is now likely to act as an arbiter, but they are known neither for speedy rulings nor for their capacity to enforce them. The concern of many, with the national security invocation, is that other countries, even beyond the scope of the US-China relationship, will use these same provisions as a pretext to enact new trade barriers and return to an age of protectionism.
And then everybody loses.
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