How Retaliatory Tariffs Could Impact the United States
Global Response to the New Steel and Aluminum Tariffs
Considering that the United States imports more than it exports, it’s no surprise that President Donald Trump wants to close the gap and renegotiate the country’s trade deals. The United States’ 2017 trade deficit with China, for example, was $375 billion. By narrowing the trade deficit, America could become much more prosperous — in a long-term, sustainable way.
Of Tweets and Tariffs
The steel and aluminum industries have recently become a focal point of President Trump’s economic strategy. On March 1, 2018, he tweeted, “Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!”.
His solution is to impose steep tariffs on foreign aluminum and steel — 10% and 25%, respectively. Initially, U.S. allies Canada, Mexico, and the European Union (EU) were given exemptions to these tariffs, a decision that many analysts and experts believed President Trump would stick to.
However, on May 31, 2018, the Trump administration removed the exemption and fully implemented the tariffs, citing Section 232 of the Trade Expansion Act of 1962. This gives the president the authority to determine if a foreign nation’s imports pose a threat to U.S. national security, as well as the authority to legislate infinite tariffs against said nations.
While some domestic steel and aluminum suppliers will benefit from these tariffs, many economic experts are concerned about the negative fallout.
Tariff Déjà Vu
This is not the first time a president has tried to improve the U.S. economy by focusing on offshore metal tariffs. Former President George W. Bush tried a similar approach in 2002, enforcing a tariff range of 8% to 30% on steel imports.
The EU was quick to respond with a very specific set of tariffs designed to affect some of the United States’ most industrious export markets. Along with over a dozen other countries — including Japan, South Korea, and Brazil — the EU also filed a complaint case with the World Trade Organization (WTO).
It wasn’t long before the WTO ruled against the United States’ new steel tariff, declaring it to be a violation of conventional rates, and slapping the United States with over $2 billion in sanctions. This, combined with a reported job loss of 200,000 in the manufacturing industry, forced the Bush administration to lift the tariff after approximately 21 months.
Although former President Bush’s steel tariff was unsuccessful, the long-term negative implications were relatively minor. The manufacturing industry was able to restructure itself, regain most of the lost momentum, and emerge with increased strength and resiliency. However, some are worried that the Trump administration’s aluminum and steel tariffs may not end with the same positive results.
The current tariffs are more extreme than the failed tariff of 2002, partially because today’s tariffs are being imposed on both aluminum and steel. Also, because the North American Free Trade Agreement (NAFTA) stipulates that certain tariffs can result in various penalties, Bush’s tariff exempted Canada and Mexico, whereas Trump’s tariffs do not. Plus, many experts consider the citing of Section 232 to be very unusual, breaking from precedent.
History Repeats Itself: Retaliation Tariff Examples
As with the 2002 tariffs, today’s affected countries are pushing back. The EU Trade Commissioner Cecilia Malmstrӧm has said that while she doesn’t want to “escalate the situation,” Europe will not sit idly by and quietly allow the tariffs to go unimpeded. In response, the EU has drafted a 10-page list of U.S. exports on which they will impose their own steep tariffs, citing popular products such as jeans, bourbon, and motorcycles as major targets.
Meanwhile, Canada, who supplies 17% of the imported steel used by the United States, stands to lose the most from President Trump’s tariffs. In order to mitigate the loss Canada expects to incur, they plan on enacting their own counter-tariffs, equaling up to 16.6 billion Canadian dollars (almost $13 billion U.S. dollars). Canadian Prime Minister Justin Trudeau tweeted that these counter-tariffs would go into effect on July 1, 2018, and would be applied to various U.S. goods, such as steel, aluminum, food items, and consumer items.
Mexico has also reciprocated with their own tariffs on U.S. steel, food, and agricultural products, while discontinuing the preferential tariff treatment of some U.S. industries. The pork sector, for example, will now face a 20% tariff to export their product. And since Mexico is the largest purchaser of U.S. pork, these imposed tariffs could have a disastrous effect, costing the pork industry $100 million annually.
China has also developed a list of 128 U.S. products on which they will apply punitive tariffs. Some economic analysts estimate that the Chinese tariffs alone could have a negative impact on 2.1 million jobs across 40 different industries. Top U.S. industries — such as the plastics, aircraft, pharmaceutical, agriculture, and automotive manufacturing markets — could see major disruption as a result.
Many economic experts and analysts fear that these retaliatory tariffs will create increased tension and distrust within the global economy, and eventually escalate into an all-out trade war. These analysts say that in addition to damaging the United States’ economy, a trade war would put major strain on the country’s political relationships with its allies.
While the Trump administration has sound reasoning in wanting to “level the playing field” for steel and aluminum supply, many fear that these tariffs will have a cataclysmic effect on the United States’ economy, as well as its global relationships.
Experts and analysts — and those in the steel and aluminum industries themselves — continue to keep a close eye on the issue and its surrounding policy and events.
Image Credit: Lightspring/Shutterstock.com