Surprisingly, few Harley Davidson employees – many of whom are Trump supporters – appear disillusioned with the president’s protectionism. “He wouldn’t do it unless it needed to be done, he’s a very smart businessman,” one worker told the Financial Times serenely, encapsulating the “In Trump We Trust” attitude that persists among many in the President’s base. Many workers were, in fact, apparently quick to point an accusing finger at the EU and even Harley Davidson itself for leaving its traditional base in Wisconsin. They are resolutely defending Trump’s claim to be “just trying to save the US aluminum and steel industry” from the unfair trade practices of foreign countries. Other US presidents would surely have been crucified for less. Trade experts predicting that protectionism would threaten US jobs have been vindicated by Harley Davidson’s pull-out. Working class Trump supporters have the most to lose. Why then do American workers continue to support Trump’s flawed protectionism? It would be easy to dismiss Trump supporters as unwise or easily deceived. Yet, this would merely trivialize a more serious problem plaguing trade politics today. Caught up in a wave of identity politics, how a policy actually affects the US economy is now arguably less important to voters than who is actually articulating it.
The Trade Conflict Widens: Drawing in the EU, Canada and Mexico
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.
Dishwashers to Nuclear Reactors: The US Retaliation List for Section 301 is Released
While this tariff discussion is going on inside Washington, of course, at least four additional things should also be taking place. First, the tariff list is only part of the Section 301 case. Also coming in the next 60 days is more detail on what the proposed “parallel” regime to more tightly screen Chinese investment will look like. This system is meant to run at the same time as the broader CIFUS process. So far, officials are unclear about Treasury intends to do to manage this new set of procedures. Second, the US is simultaneously moving ahead with a case against China at the World Trade Organization (WTO). Third, negotiations between the US and China should be ramping up. Since the clock is ticking on the imposition of tariffs, with only 30 days before they are meant to take effect, there is extremely limited time to get to an agreement. Given the sweeping nature of US complaints and the unclear goalposts that China needs to meet to head off sanctions, it is not obvious that 301 retaliation can be stopped. Finally, the Chinese are likely to put out their own list of counter-retaliation measures. They just published a list of 128 items subject to $3 billion in sanctions as part of their own response to US steel and aluminum tariffs. These included new barriers to US exports of wine, fruits and nuts. But these are likely to look like minor issues compared to what China has in store for the Americans in the wake of the $50 billion in tariff hikes under the Section 301 dispute. In short, the publication of the tariff list today heralds the start of a new era in US-China relations and the beginning of a totally different American trade policy. Firms should be braced for some very rough times ahead.
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.