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.

In mid-March 2018, President Trump announced that he would temporarily exempt the EU from U.S. tariffs on steel and aluminum until May 1. In the meantime, U.S. Trade Representative (USTR) Lighthizer and Commerce Secretary Ross negotiated with the EU on improved market access for U.S. goods. Trump yet again pointed to the supposedly high tariffs of the EU, which – in his opinion – excluded 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; thereafter, the tariffs were imposed on these countries. The United States reached agreements with Argentina, Australia, and Brazil for permanent exemptions. 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 their free trade agreement (KORUS).

Protection in the Name of National Security

The steel and aluminum 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. But the steel and aluminum tariffs will 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 (3 % of American steel), the largest percentage in the EU, in 2017. However, the consequences of trade diversion effects are expected to be even more impactful on German business than the tariffs themselves: up to 13 million tons of cheap steel could be diverted to European markets. The greatest threat is the tit-for-tat spiral of protectionism worldwide; since spring 2018, Canada, Mexico, China, Turkey and the European Union have initiated retaliatory tariffs in response on millions of dollars of U.S. products.

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 400,000 U.S. jobs as a result of U.S. tariffs and retaliatory 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 imposition of the tariffs on the EU and Trump’s trade policy are deeply worrying. The United States furthermore risks 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 World Trade Organization (WTO). Thus, the EU, as well as Turkey, Switzerland, Russia, Norway, Mexico, Canada, India and China, are right in having filed complains at the WTO. The rebalancing tariffs of 25 percent on 2.9 billion Euro of American products such as motorcycles, peanut butter, whiskey, orange juice and cigarettes that the EU imposed in June 2018 were moreover both a strategic and a necessary decision; however, the effects of the tit-for-tat spiral of retaliatory tariffs imposed by several countries will likely be substantial.

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.