President Donald Trump is taking a high-stakes gamble on trade. Tariffs on steel and aluminum will not have the huge impacts on supply chains that critics often claim, but those stand to upset the whole global trading system and specifically, the role of the World Trade Organization.
The lesson from the 2002 safeguard tariff is, after a brief price spike, the ultimate impact on material prices should be about half the 25 percent and 10 percent tariffs on steel and aluminum. Simply, foreign suppliers will find ways to cut costs and accept slimmer margins, and new domestic supplies will come on line.
By my math, the impact of the steel tariff on the price of the typical $36,000 car, which contains about one ton, should be $125 to $150. For a $20 12-pack of beer, the aluminum tariff should add about 3 to 5 cents.
Such small price effects – coupled with exemptions for Mexico and Canada (which are the only import sources that may realistically participate in just-in-time production) and other allies – indicate that considerable amounts of foreign steel and aluminum will continue to be used in the United States.
However, the tariffs appear broad for a national-defense exclusion under the WTO agreements, and terms of exemptions for allies in Europe and Asia will be critical to an evolving Trump strategy to shake up trade in more than just steel and aluminum.
Cutting the $650 billion annual trade gap by one-third could directly create about 1 million jobs. Manufacturing would benefit most, and it finances two-thirds of business research and development. Investments in intellectual property for new materials, supply chain management, artificial intelligence and the like would substantially boost long-term economic growth.
China accounts for more than 60 percent of the U.S. trade deficit and habitually subsidizes domestic industries, limits imports in areas of rapidly advancing technology to incubate its own competitors, and forces foreign multinationals to transfer technology as a condition for market access. It compels their compliance with the Communist Party political agenda and insidious activities monitoring its citizens.
China has targeted one U.S. industry after another – metals, solar panels, computer chips, artificial intelligence and supercomputers – many having significant economic and national security consequences.
The administration is implementing a much broader response to China – covering a wider range of bilaterally traded products than just steel and aluminum – and rules for Chinese investment in the United States, expected to mirror Beijing’s restrictions and performance requirements for U.S. and other Western investment in the Middle Kingdom.
Employing the mercantilist strategies noted above, China has built up vast aluminum and steel capacity beyond its domestic needs and flooded global markets with those products. Aluminum smelting is a shell of what it once was and the steel industry has huge excess capacity.
The Bush and Obama administrations slapped antidumping and subsidy countervailing duties on Chinese metals, but China’s exports into Asia and Europe find their way into U.S. markets – either simply transshipped, as the origin of these commodities is often too difficult to identify, or by displacing production in other markets that is then shipped here.
For trade in other industries, the Obama administration was increasingly frustrated in efforts to obtain relief through the WTO or WTO-approved mechanisms.
Part of the problem is that the WTO essentially imposes a set of rules for government policies in market economies, and those rules do not neatly apply to state-owned enterprises or private firms having significant participation of the Chinese government in its management. And part of the problem appears to be in how dispute settlement panels and the appellate body try to apply those rules.
Obama and now Trump made it U.S. policy to hold up appointments to the appellate body and to table a long list of complaints about the process.
Frequently mentioned in the steel and aluminum tariff exemption process for European and Asian allies are what policies they may take to keep their markets from being a conduit for Chinese excess capacity.
And as the United States girdles its loins for a slugfest with China over trade and investment, these metals tariffs are a preliminary test of what the Trump administration will seek from its allies in dealing with China and reforming the WTO.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times, LLC.