The eye-for-an-eye approach to trade

On March 8, America’s populist-in-chief signed an executive order slapping a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. President Trump said he did it to protect the nation’s economic and national security. It came a little over a month after Trump said he would impose tariffs and quotas on imported solar panels and washing machines.

The United States has had the world’s largest trade deficit ever since 1975. In 2017 imports were about $2.9 trillion and exports were just over $2.3 trillion, as Americans continue to consume more than we produce.

The steel and aluminum tariffs have aroused little enthusiasm and much criticism. Naysayers argue they will do nothing to strengthen America’s economy or national security, and spark a global trade war. They say the tariffs will result in higher prices as steel users pass costs onto consumers.

Supporters claim there already is a trade war underway and it is being waged by China. That country accounts for more than two-thirds of America’s current trade deficit. We import $506 billion – mainly consumer electronics, clothing, and machinery – from China, but export only about $131 billion in goods.

China has been blocking high-value exports from the United States. For example, it charges a 25 percent import duty on cars, 10 times the 2.5 percent levy the United States puts on imported vehicles.

China also imposes steep tariffs on imported automobile parts. As Elon Musk tweeted, “No US auto company is allowed to own even 50% of their own factory in China but there are five 100% China-owned EV auto companies in the US.” Obviously, engaging in tough trade talks with China is long overdue.

It will take years for the United States, China and the global trading system to work out imbalances on a wide range of goods. America’s prosperity depends on a robust approach to correct failed trade policies, with a focus on the industries of the future. It makes no sense for America to excel at innovation without securing the domestic and foreign markets for its products.

It merits mentioning that instances in which American companies ship raw materials to China for assembly at a lower cost, then sell the finished products count as imports. American multi-national companies are happy to hire foreign workers from emerging markets with lower standards of living to keep their labor costs low and profits high. They figured out that to make income redistribution work on a global scale: American workers have to be less welloff so their overseas counterparts can be less poor.

But the new tariff on steel imports will not impact China. The United States is the world’s biggest steel importer, buying 35.6 million tons in 2017. Nearly 17 percent come from Canada, 13.2 percent from Brazil, and 9.7 percent from South Korea. Unless the Chinese are routing their steel exports through American allies, the U.S only imports about 3 percent of its steel from China.

After pushback from Canada, wiser minds prevailed within the administration and tariff sanctions were suspended indefinitely pending renegotiation of the North American Free Trade Agreement.

The tariffs may trigger reprisals. The day after President Trump signed the tariff executive order, the European Union published a 10-page list of American products that would be targets for retaliation, including peanut butter, grains, and motorcycles.

While steel and aluminum account for only a small portion of trade, the President’s rhetoric indicates that this is just the opening salvo from the White House bunker after years of benign neglect. The primary target is China. Trump has already called its unfair trading practices “an assault on our country.”

As the head of the World Trade Organization, one of the guardians of the global trading system, noted after the tariffs were announced, “Once we start down this path it will be difficult to reverse direction. An eye for an eye will leave us all blind and the world in a deep recession.”


Originally Published: Mar 22, 2018

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