The new protectionism

There will be retaliation from China, EU to Trump’s tariffs. India stands to lose relatively little.

Written by Devashish Mitra | Published: March 14, 2018 1:00 am
Trump says will talk to UK's Theresa May US President Donald Trump announced 25 per cent and 10 per cent tariffs respectively on steel and aluminum imports.(Reuters)

During his presidential campaign, Donald Trump advocated a 45 per cent across-the-board tariff on imports from China due to his concerns about America’s growing trade deficit with China, China’s intellectual property theft and its dumping and government subsidisation of cheap goods produced by state-owned enterprises. Trump also propagated the strange idea that global warming was a myth invented by the Chinese to handicap American manufacturing firms.

A couple of months ago, a year after President Trump’s inauguration, his administration slapped 30 per cent and 20 per cent duties respectively on imports of solar panels and washing machines, using a provision within WTO and US trade laws that allows for temporary “breathing-space” or safeguard protection when import surges lead to injuries in the form of serious losses in profits and employment. In response to the tariffs on washers and solar panels, China has initiated an investigation on the dumping or, alternatively, subsidisation of $1 billion worth of US exports of sorghum (a multipurpose grain). This investigation could lead to anti-dumping or countervailing duties that will hurt American farmers. There could then be further rounds of counter-retaliation by the US and China, through slapping of tariffs on each other, leading to large losses to both countries’ producers and consumers.

A few days ago, President Trump announced 25 per cent and 10 per cent tariffs respectively on steel and aluminum imports. Exceptions have been made for Canada and Mexico. However, President Trump has been clear that this exception will be taken away if terms from the renegotiation of the North American Free Trade Agreement (NAFTA) are not to his liking. While Canada is the biggest exporter of these two metals (totaling about $12 billion) to the US, the EU (with these exports equaling $7 billion) is next. Interestingly, the EU and other countries have been encouraged by Trump to enter into negotiations with the US to provide it better terms of trade in exchange for a metal tariff exception. Phil Levy, formerly senior trade economist in President George W. Bush’s administration, has aptly described this as an “extortion racket.”

China, which is supposed to be the target here, currently sells the US only $1 billion worth of steel and $1.8 billion of aluminum, just 6 per cent of total US imports of these two metals. Chad P Bown of the Peterson Institute for International Economics estimates the loss to China from these tariffs to be only $0.7 billion, roughly a fourth of the $2.6 billion loss to the EU. This is because 94 per cent of US imports of steel from China is already subject to high anti-dumping and countervailing duties.

The new metal duties are being imposed under a rarely-used national-security provision (under WTO and US trade laws) for ensuring sufficient domestic supply of these metals in the event of a war. However, these tariffs will end up hurting America’s strategic and military allies the most, thereby turning the national security argument on its head.
Despite China’s small loss from these metal tariffs, it has signaled retaliation. It is likely to continue with its strategy of slapping tariffs on US agricultural products, thereby hurting President Trump’s rural electoral base of farmers. This time China is quite likely to target its $14 billion worth of imports of American soybeans. But a much stronger retaliation is expected from the EU. While it is lodging a complaint with the WTO, it is also planning to retaliate immediately and quite strategically with tariffs on bourbon produced in Kentucky, the Senate Majority Leader Mitch McConnell’s constituency, on Harley-Davidson motorcycles and cranberries, both produced in Wisconsin, the home state of House Speaker Paul Ryan, and on oranges produced in the swing state of Florida.

Regarding the WTO complaint, it will be interesting to see how the use of the national security provision plays out, since, as some commentators have argued, WTO rules allow countries to “self-judge” their national security concerns. The WTO cannot claim to assess a country’s national security situation better than its president. However, analysts such as Bown have also argued that President Trump’s own arguments in favour of these tariffs relying on China’s actions such as dumping, subsidisation, building overcapacity in steel and aluminum production etc can be used by the WTO judges to infer that national security was not the actual reason for the tariffs. In that case, the WTO would just go ahead with the evaluation of these as safeguard tariffs. Here again, the absence of any surge in the EU’s steel and aluminum exports to the US might lead to a judgment declaring these tariffs on imports from the EU to be WTO-illegal.

However, it is not clear whether Trump cares about the WTO rule book or even remaining in the WTO. If, however, the WTO takes the position that it cannot rule on countries using the national security provision, it will open the door to the use of this provision by many other countries. Protectionism will then quickly spread across the world.
President Trump, while announcing his new metal tariffs, also threatened India with reciprocal-tariffs: Any tariff by India will receive an equal response from the US. This is not inconsistent with the dissatisfaction he expressed to Prime Minister Modi with the reduction in tariffs on Harley Davidson motorcycles from 75 per cent to 50 per cent, informing him that the US imports “thousands and thousands” of Indian motorcycles at zero tariffs. By all accounts, this piece of negotiation is based on “alternative facts.”

Anyone with a better understanding of economics than President Trump will know that two countries at very different stages of development will not see significant two-way trade in similar products, so that the same reciprocal tariff on both sides on the same product is completely meaningless. India’s tariffs, despite recent hikes, are, unlike the US’s, still within bindings it committed to at the WTO. While WTO rules don’t seem to constrain Trump’s actions, India should feel safe and derive comfort from the fact that it is on the right side of the WTO rules and loses relatively little from the new metal tariffs ($0.3 billion by Bown’s calculations)

The writer is Professor of Economics and Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University, New York

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  1. D
    Dillip Patnaik
    Mar 15, 2018 at 4:47 am
    China and other countries were taking advantage of US open market leaving millions of USA rustbelt industrial workers out of s. Most of the manufacturing companies closed down the factory and went to China for maximum profits. This cannot happen under Trump's watch. China is dependent on US so as Japan, S. Korea and Europe. Retaliation won't work. Those countries has to find out how to deal with Trump's doctorine.
    1. Employ Ment
      Mar 14, 2018 at 9:26 pm
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      1. B
        Mar 14, 2018 at 8:55 am
        1. K
          Mar 14, 2018 at 8:20 am
          India should use the opportunity and start working to exporting soyabean and oranges to Europe and China. Nagpur produces abundant quanity of oranges. If necessary, we should get diffe varieties of orange saplings from diffe parts of the world and grow here. A wonderful opportunity which is emerging. For a poor country like India, Harley-Davidsons are not a priority. In any case, India exports a miniscule number of two-wheelers to US, and that should not hurt us much. Some of these companies can export the same from their global operations.