March 5, 2018, by Trevor Kincaid
Donald Trump’s tough trade talk has the world on edge. With the stroke of a pen, he could unravel the global trading system, raise prices on basic goods, make American businesses less competitive, drive a wedge between the United States and its European allies, and open the door for China to construct new national security based trade barriers.
Trump’s plan, which shocked markets last week, would raise tariffs – or taxes – on the steel and aluminum used to make everything from car engines to skyscrapers to beer cans. It’s basic economics: when taxes go up on the inputs of manufacturing, higher costs are passed onto consumers. Economists agree that Trump’s policy would threaten far more American jobs than it would protect.
Global analysts are watching closely. World Trade Organization Director General Roberto Azevêdo recently said that the “potential for escalation is real, as we have seen from the initial responses of others. A trade war is in no one’s interests. The WTO will be watching the situation very closely.”
Trade wars do not benefit anyone. Most people living today don’t remember the last trade war, which is blamed for worsening the pain of the Great Depression and, by some accounts, helping to foster the political extremism that led to World War Two. It started with the Smoot-Hawley Tariff Act, passed by Congress in 1930 – despite warnings from U.S. allies – under the guise that raising import duties would protect American businesses and reverse trade deficits. Those new taxes were met with an aggressive response from America’s trading partners. The damage was severe and rapid: from 1929 to 1933 U.S. imports decreased 66 percent and U.S. exports decreased 61 percent. Workers lost jobs, farmers lost customers and household items got more expensive.
Trump is inches away from igniting a similar tit-for-tat trade war with America’s largest trading partners. Once the United States imposes higher tariffs, Europe is likely to respond immediately by targeting key American exports; China, Canada and Mexico could also retaliate with their own punitive measures. Trump has already said he would then up the ante and work to raise tariffs on cars coming into the United States from Europe – although that would require a formal process or an act of Congress.
Trump’s aluminum and steel tariffs will drive up the price of everyday household items at a time many are already struggling with high health care costs and rising gas prices. Commerce Secretary Wilbur Ross, who made billions in the steel industry, brushed aside concerns that middle-class Americans would object to paying more. “Who in the world is going to be too bothered?” he asked rhetorically.
Meanwhile, American industries that are unable to export to important markets could be forced to decrease production, cut hours, lay off workers, and potentially close their doors.
The national security rationale for unleashing this economic pain is perplexing. It could easily backfire and set a precedent that makes the United States even less secure. America’s top steel exporters include allies like Canada, South Korea, Mexico, and the European Union. China ranks eleventh. Trump’s weak argument could empower China – and other countries – to erect their own trade barriers under the cover of vague national security arguments.
It was this concern that drove the Obama administration to challenge China’s tariff increase on rare earth exports at the WTO. Rare earth elements are used to manufacture hybrid car batteries and wind turbines; they’re also used to produce laser targeting devices and the F-35 Lightning II joint strike fighter. The Obama administration teamed up with Japan and the EUto confront China and won – keeping Pandora’s box closed and strengthening the rules based trading system.
When the world was picking up the pieces from World War Two, America led the way in constructing a rule-based framework for international commerce. Those rules and institutions have given confidence to countries large and small for nearly 100 years, providing a peaceful and fair forum for dispute resolution.
Enforcement of international rules is key to the health of the system and the success of any trade agreement; without accountability the system can’t run. If Washington circumvents these rules to pursue a rogue approach, Trump will preside over the abdication of U.S. leadership and the ascension of Chinese influence. He will turn America’s back on the system it built.
Trump isn’t alone in the view that there is a global overcapacity in steel production, and that China is the cause. G20 nations established the Global Forum on Steel Excess to address this global steel glut. But this system needs help and it needs reforms. The opportunity exists for Trump to craft a positive legacy on trade. Not through dismantling the international order but by strengthening and updating it.
America should draw a hard line with China. There are imbalances that exist between China and the rest of the world, and run afoul of their commitments. While most WTO members open their markets, China closes theirs. The EU and the United States operate under the rule of law, yet China steals intellectual property that has required investments of time, money, and talent.
There are ample opportunities for Trump to lead. But a hard line doesn’t have to mean hardship.