Could The U.S. Imposing Tariffs On Imported Steel Trigger Possible Trade War With China?

Latest Update as of March 8, 2018, 6:00 p.m. ET: President Trump signed an order imposing stiff and sweeping new tariffs of “25 percent on imported steel and 10 percent on imported aluminum” from every country except Canada and Mexico at the White House on Thursday, March 8, 2018, according to NPR (Horsley, 2018).

Update as of March 6, 2018: President Trump’s top economic adviser Gary D. Cohn, who leads the National Economic Council, is resigning, The New York Times reported on March 6, 2018 (Kelly & Haberman, 2018).  White House said there was no specific reason for the departure, but “his decision to leave came as he seemed poised to lose an internal struggle over Mr. Trump’s plan to impose large tariffs on steel and aluminum imports.”

Photo by Spencer Platt:Getty Images.jpg

Lead Photo courtesy of Spencer Platt/Getty Images

By Saurav Bhandary    · Published: March 5, 2018 · Updated: March 8, 2018

A tariff, simply put, is a tax levied on an imported good. Tariffs have been used as a political tool throughout history to restrict the flow of imports into a country.

Countries generally use this policy tool for mainly two reasons- either to raise revenue or to shield their domestic industries from foreign competition. This move is clearly intended to protect America’s domestic industries by making imported steel and aluminum more expensive. While the tariffs make the domestically produced steel and aluminum more attractive relative to foreign production, it is unclear if the domestic steel and aluminum demand will be met by domestic production.

A defiant President Trump tweeted on Friday, March 2, 2018, “trade wars are good, and easy to win” (Horsley, 2018).

The White House has argued that the tariffs would punish China and other U.S. competitors for unfair trade practices (Werner, Long, & Lynch, 2018). Among its supporters are steel and aluminum makers in the U.S. who say thousands of jobs have been lost due to other nations “dumping cheap imported products” in the country (Spangler, 2018). They also argue that other countries use their cheap labor and low prices, and sell their products in the U.S. in a way that destroys the domestic manufacturing industries.

In another Twitter post that came out on March 1, 2018, Mr. Trump 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.”

Similarly, Commerce Secretary Wilbur Ross, also a supporter of tariffs, said to CNBC, “the impact of the increase would be broad but not as painful as many companies are alleging.” He went on to say that “other countries would only lose if they vowed to respond with tariffs on U.S. agricultural products, as it would drive up costs for their own consumers” (Paletta, 2018).

China has clearly indicated that if necessary they will take action. Other countries like Canada, Brazil, South Korea, and Mexico that export steel and aluminum to the U.S. are also likely to strike back. These powerful nations could fight back by imposing tariffs on some U.S. goods going into their countries (Long, 2018).

“China urges the US to use trade protection tools with restraint and comply with multilateral trade rules so as to make positive contribution to the international economic and trade order,” China’s commerce ministry said in a press release that came out on Feb. 18, 2018, adding, “If the final decision of the US affects China’s interests, China will definitely take necessary measures to safeguard its legitimate rights” (the Ministry of Commerce (MOFCOM), 2018).

Similarly, other countries have also expressed their concerns over the move. Some of the reaction expressed by some major U.S. trade partners:

Canada: “Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers,” said Canadian Foreign Minister Chrystia Freeland in a statement issued on March 1, 2018, calling any trade restrictions “absolutely unacceptable” (Global Affairs Canada, 2018).

Mexico: Citing government sources, The Financial Times said Mexico had “made it clear that if included [in tariffs], Mexico will have no other option than to react” (The Financial Times, 2018).

Australia: “The imposition of a tariff like this will do nothing other than distort trade and ultimately, we believe, will lead to a loss of jobs,” Australian trade minister Steven Ciobo told reporters in Sydney (Duffin, Mitchell, & Martin, 2018).

Japan: “I don’t think exports of steel and aluminum from Japan, which is a U.S. ally, damages U.S. national security in any way, and we would like to explain that to the U.S.,” said Japanese Trade and Industry Minister Hiroshige Seko (Chung & Kaneko, 2018).

“If the United States goes down this path for steel and aluminum, there is little to prevent other countries from arguing that they too are justified to use similar exceptions to halt US exports of completely different products to their markets,” argues Chad P. Bown of the Peterson Institute for International Economics, a private non-profit think tank focused on international economics, based in Washington, D.C. (Bown, 2017).

The markets were quick to respond, stocks fell in response to the potential tariffs, and shares of both American Automakers and Boeing declined (Swanson, 2018).

US imports (in 2017, tonnes, m) Chart by The Economist

Chart courtesy of The Economist (2018)

The U.S. auto and aerospace industry, for instance, heavily depends on steel and aluminum imports. As a result of tariffs, production costs will go up for the companies that use steel and aluminum in their products. It would also mean those companies now would have to either raise prices or lay off workers. These costs are more likely to get passed on to consumers in the form of higher prices.

Imposing tariffs could disrupt “the complex supply chains(Zarroli, 2018). Manufacturers “will be paying higher prices for our stainless steel going forward, ironically making us less competitive against foreign finished goods that use foreign steel. It is of utmost importance that the administration takes steps towards shielding the end-users of American steel from the undesired effect of steel being shipped into the United States not in the form of raw material but in the form of finished goods,” said Greg Owens, a co-owner and president of privately held stainless steel silverware maker Sherrill Manufacturing Inc, in an emailed statement to TheStreet (Terrarosa, 2018).

The move could “spark a trade war” and also complicate the U.S. trade relationship with China, Canada, Mexico, and other countries (Lowrey, 2018).


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