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.
Viewing Steel As an Example of "America First"
Moreover if the US tries to justify a broad-based tariff or quota for all steel products on the grounds of 'national security,' it will embolden other countries to use the same justification on other categories of products leading to retaliation. Restrictive unilateral actions will not provide lasting solutions either. In short, labelling steel imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners. But such a rational decision may not be so likely.
Limiting US Steel Imports Under Section 232
If the Trump trade team implements Section 232 for steel, it may use the same tool for other products in the future (and a similar investigation for aluminum is already underway). The Department of Commerce has been tasked to conduct the investigation, and to prepare a report for Trump within 270 days from the investigation’s initiation. Upon the submission of the Department of Commerce’s findings and recommendations, Trump will have up to 90 days to decide if he concurs, and to take action to ‘’adjust the imports of an article and its derivatives.’’ This Talking Trade post examines the 1,598 pages of public comments received by the Commerce Department in relation to the steel case from three key groups - domestic steel producers, downstream manufacturers reliant on steel inputs, and steel producers from other countries including Brazil, Canada and China.
“Moderating” on Trade in Washington? Don’t Bet on It Yet
There is a reason that such trade tools have not been used by the United States for decades. Section 232 was first drafted in 1962 for use during the Cold War. It joins a long line of dusty laws that allow an economic nationalist in the White House to do many deeply damaging things in trade. Trump's Executive Order reviewing the "Buy American, Hire American" issued on April 17, 2017, fits within this overall mindset as well. The sigh of relief over the relatively benign nature of the first 90 days in office from the Trump administration may be due to a lack of understanding of what is behind relatively anodyne sentences on the page. The economic nationalists haven’t gone away. They’ve maybe just gotten smarter at packaging.