Trade War Is Brewing

Patrick Watson  |


I’ve been predicting trade war ever since the 2016 election—and for a good reason.

President Trump promised and implemented all sorts of harsh trade actions. He killed the Trans-Pacific Partnership agreement within days of taking office, which was a big deal.

Since then, we’ve seen more talk than action. But stuff has been brewing in the background, and now some of it is taking shape.

  • Negotiators are reworking the North American Free Trade Agreement (NAFTA).
  • New tariffs are hitting foreign-made solar panels and washing machines.
  • Steel imports may soon get punished.

All these moves matter far beyond their immediate impact.

Tariffs Recommended

On February 16, Commerce Secretary Wilbur Ross stated that steel and aluminum imports “threaten to impair” US national security. He recommended that the president impose new tariffs or quotas to reduce this threat.

The Commerce Department report was a response to President Trump’s request last year for a Section 232 investigation under the 1962 Trade Expansion Act. That law lets the president bypass Congress to address trade-related national security threats.

President Trump thinks China is acting unfairly by dumping excess steel on the world market to the disadvantage of US steel producers. He wants to stop it, but Congress won’t follow his lead because steel consumers, like automakers, enjoy the low prices.

This has been brewing since last summer. Now it’s happening, and it’s potentially a big deal. Both foreigners and Americans will be hit.

Deeper Threat

The Section 232 investigation recommends that the president solve the steel problem in one of three ways:

  1. A global tariff of at least 24% on all steel imported to the US
  2. A 53% tariff on steel imported from 12 specific countries, including China, India, and Korea, along with a quota capped at their 2017 exports to the US
  3. A quota on all countries at 63% of their 2017 US sales

The Commerce Department also made similar but less harsh recommendations for aluminum. The president must decide by April 11 on steel and April 19 on aluminum.

Bloomberg reported last Friday that the president is leaning toward the harshest recommendation, the 24% global tariff. Axios reported that he even wants to raise it to 25%.

Any of these measures will mean higher prices for US steel and aluminum consumers. That’s you if you want to buy a car, or a steel-framed building, or you drink beer from aluminum cans.

It could also be a huge problem for Canada if the president includes our northern neighbor in any tariffs and quotas. Canadian steel is highly integrated into US manufacturing.

Note, by the way, that Canada built much of its steel industry specifically to help US national security by supporting a key ally. To now be punished because it is allegedly threatening US national security won’t sit well with Canadians. Nor should it, in my opinion.

That brings us to the real problem. Steel and aluminum are only the symptoms of a bigger threat to the global trading system.

Retaliation

The deeper issue here is that Section 232 bypasses both Congress and the present world trade dispute resolution process.

Countries have trade disagreements all the time. The World Trade Organization (WTO) works to resolve them. President Trump thinks the WTO’s methods are unfair. His solution, if he moves forward on the steel and aluminum actions, is to simply roll over the opposition using national security as a pretext.

The problem is, other countries won’t tolerate this. Their own domestic industries and voters will demand action, so it’s very likely that foreign governments will invoke their own national security concerns and retaliate against US exports.

Note also that the retaliation won’t necessarily be against US steel or aluminum. They could penalize US technology, agriculture, or consumer brands. My Twitter friend, former trade diplomat Harald Malmgren, says China will most likely respond with “asymmetric” measures designed to inflict pain on key US interests, including non-trade interests.

This is how trade wars begin, and they rarely end well for anybody. They also spread through markets quickly. Trade flows drive currency exchange rates, which affect all kinds of other things—not to mention the equity and bonds issued by companies that lose export revenues or see their raw material costs rise.

Maybe President Trump will decide not to do anything, and this will all blow over. Or maybe not. Either way, we should find out soon.

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