Tit-for-Tat Protectionism Hurts Everybody

Steel processing © Fotolia/Oleg-F

U.S. President Trump’s “America First” trade policy is not only a threat to the global economy and world trade. It also endangers U.S. competitiveness and jobs. Protectionism hurts the poorest most. If Trump wants to strengthen the industrial base in the United States, he should rather invest in education and infrastructure, Stormy-Annika Mildner, trade expert at BDI argues.

Mid-March 2018, President Trump announced that he would temporarily exempt the EU from global tariffs on steel and aluminum until May 1. In the meantime, U.S. Trade Representative (USTR) Lighthizer and Commerce Secretary Ross were to negotiate with the EU improved market access for U.S. goods to the EU. Trump yet again pointed to the supposedly high tariffs of the EU, which – in his opinion – exclude U.S. producers from the EU market. He also reiterated the idea of reciprocal tariffs: the United States should apply the same level of duties as other countries do. The relief among European business was thus only short-lived.

Few hours before the expiration of the “grace period”, Trump extended the exemption for the EU, Canada, and Mexico until June 2018 to allow for further talks. According to the White House communication, the United States has reached agreements-in-principal with Argentina, Australia, and Brazil, meaning that these countries will be exempted permanently. The details “will be finalized shortly”, the statement added. Previously, the United States already agreed to exempt South Korea from steel tariffs, instead imposing a quota on steel imports as both countries agreed to revise KORUS.

Protection in the Name of National Security

In early March, 2018, President Trump signed the tariffs on steel (25 percent) and aluminum (ten percent) into law. These tariffs came as a result of a Section 232 (Trade Act of 1962) investigation into the effects of steel and aluminum imports on the United States’ national security, and furthermore the finding of the Department of Commerce that these imports did, in fact, threaten the national security. The steel and aluminum tariffs will indeed cause more detriment than good to global trade, as well as American industry. German industry is deeply concerned about these measures and the protectionist sentiment they impart.

Germany is the fifth largest supplier of steel to the United States, with exports worth 1.8 billion U.S. dollars (three percent of American steel), the largest percentage in the EU, in 2017. However, if punitive tariffs are imposed, the consequences related to trade diversion effects would be more impactful on German business than the global tariffs themselves: up to 13 million tons of cheap steel could be diverted to European markets. The greatest threat, however, is that Trump’s tariffs could lead to a tit-for-tat spiral of protectionism worldwide.

Trump Hurts His Own Economy Most

Ironically, the effects of the tariffs will be far from what the Trump administration wants to achieve: creating jobs, reviving industries, and protecting the United States from cheap or dumped imports from China. The Trade Partnership projects a net loss of 146,000 U.S. jobs as a result of the measures. There will be modest gains in employment in U.S. steel and aluminum firms. However, the job losses in manufacturing sectors will be much greater. Two-thirds of these job losses would affect workers in low-skill and production jobs; the very working class who voted for Trump in 2016. Moreover, the tariffs will likely lead to lower consumer spending power in the United States as well as higher production costs. Trump wants to reindustrialize the United States. But his tariffs threaten to have the opposite effect.

The EU is not a Security Threat

The claim that EU steel and aluminum endanger national security in the United States is absurd. Therefore, the EU is rightly excluded from the tariffs. However, Trump’s trade policy remains deeply worrying. The exceptions do not completely solve the problem of trade-diverting effects, even though the largest exporters to the United States are now exempted. Steel and aluminum, which were previously exported to the United States, are still likely to be diverted to the EU market and put pressure on European producers. Furthermore, the ‘grace period’ of little more than five weeks creates considerable uncertainty in the markets. The United States is also risking an escalating trade conflict with China and all states that continue to be affected by the tariffs. The tariffs are an affront to the rule-based, multilateral trading system under the WTO.

The EU has to react to Trump’s go-it-alone trade policy. Together with its trading partners, the EU needs to challenge the tariffs at the WTO. It should additionally carefully watch for trade diverting effects and possible additional harm to European steel and aluminum producers. If this is the case, the EU should implement its own safeguards on steel and aluminum imports. It goes without saying that these need to be taken in accordance with WTO rules. They also need to be carefully calibrated as they negatively impact producers that rely on steel and aluminum in intermediary production. Rebalancing, in which the EU imposes tariffs on American products such as bourbon, blue jeans, peanut butter, and motorcycles, is, on the other hand, a dangerous route, threatening a tit-for-tat tariff spiral, which could quickly get out of hand.

President Trump is right in stating that competition on world markets is not always fair and that not all countries play by the rules. He is also right that global steel markets are far from functioning perfectly. Quite the contrary, steel overcapacities in China still distort global markets. But his solutions are fundamentally wrong. The solutions lay not in national go-it-alone actions but in working together in the WTO and the G20 Global Forum on Steel Excess Capacity. Trump is right that not everyone has benefited sufficiently from globalization and that many have been left behind. But again, his solution is wrong. To ensure that everybody benefits from globalization, more investment in education is indispensable. In the end, open markets are the basis for our prosperity and well-being.