While our primary focus has been on the evolution of the trade battle between the US and China, the conflict has widened. Late last week, the Trump administration announced the end of a temporary stay on the imposition of steel and aluminum tariffs for the European Union, Canada and Mexico. Starting at midnight on June 1, steel exports to the United States were slapped with 25% tariffs, and aluminum with 10% tariffs. US National Economic Advisor Larry Kudlow argues that the tariffs are simply a matter of a “family quarrel,” the imposition of new barriers on trade into the US shows the spread of conflict. There are at least four reasons why this is absolutely not just a minor issue. Kudlow has said that tariffs with Canada “may go on for a while or they may not.” For the firms that are suddenly paying significantly higher prices for imported steel and aluminum, it probably doesn’t much feel like a small argument. A 25% price hike overnight is sufficient to drive firms out of business entirely. Finding new sources of supply takes time, effort and probably escalated costs.
232: A Bad idea Getting Worse
The potential use of Section 232 on autos appears to be driven by Trump’s personal irritation that American tariffs on cars is just 2.5%, while tariffs on autos in other markets can be higher. He and Ross have repeatedly argued that it is profoundly unfair that reciprocity does not work in the international trading system. By this, they mean that tariffs are not equal, ie 2.5% tariffs are matched by 2.5% tariffs. By using Section 232, however, Trump and Ross would be able to raise the tariffs on autos to something considerably higher. (Note, however, that the US still imposes a 25% tariff on pickup trucks, which represent a substantial portion of the market.) The global rules do allow national security exceptions and let countries “break” bindings on tariff ceilings. The US could, in theory, raise auto tariffs above the current rates and get closer to what Trump and Ross seem to want. But the costs of doing so would be catastrophic. While there was basically no rationale for raising tariffs on steel and aluminum (particularly not when granting some country exemptions and then some firm exemptions), there is absolutely no reason for granting national security exceptions to autos to the United States during a time of peace.
The Breakdown of the System: US National Security "Exception" for Steel
Fourth, other countries will start to use “national security” exceptions to block imports of all sorts. Here is the real danger of Trump’s policy. Once the major players in the system start to undermine the key norms of behavior, it opens the door for everyone to misbehave. Finally, by imposing such high tariffs on key items in the economy, Trump has successfully raised costs for products across the board inside the United States. This may appear to be a problem only for US consumers and firms. Given the tight integration of supply chains, however, Trump’s tariffs might actually affect global firms and citizens in completely unrelated places. Parts and components, for example, may become 25% more expensive with no quick or easy solution for replacement in the short run. Thus, what at first may seem to be a purely domestic issue—the imposition of tariffs on steel and aluminum against China inside the United States—is going to have global implications. The world should not view this threat lightly. The escalation of challenges to the global trade system appears to have begun.