US President Donald Trump has made good on his threat of imposing 25% and 10% tariffs respectively on steel and aluminum. Originally meant to be imposed on all countries, he now plans to apply the tariffs surgically, exempting “good friends and neighbors,” Canada and Mexico, immediately. Other allies such as Japan, Australia and possibly some European Union members could also be exempted. Together they probably account for more than 80% of US steel and aluminum imports.
Exempting the biggest exporters of the two metals would render Trump’s tariffs meaningless, because US producers would not be any better off. US businesses using steel and aluminum to make their final products would still import these metals from America’s “friends and allies.”
Moreover, imposing tariffs on steel and aluminum would increase the cost of manufacturing, eroding that sector of the US economy’s competitiveness further. To that end, the tariffs would not only violate World Trade Organization rules, but would trigger an inflationary spiral, because the tariffs would be passed on to consumers. The retail price of a can of beer or juice would rise.
Neither does the national-security argument make sense, because the US is already the world’s most advanced powerful country militarily. As it already possesses more than 6,000 nuclear bombs, which could destroy the world and kill all its living species many times over, adding additional ones would not make America any safer or less vulnerable to external attacks. Besides, why would any nation want to threaten the US?
The fact of the matter is it is the US that threatens China and other “revisionist” powers by building hundreds of military bases surrounding them.
Tariffs might be re-election strategy
So if it makes no economic or military sense to impose tariffs on steel and aluminum, particularly when the US imports less than 3% of the total from China, the policy might be a re-election strategy. First, China might not raise hell about them, since its producers are only marginally affected, although Beijing did threaten retaliatory measures. Second, Trump would appear to have fulfilled a campaign promise, which could raise his re-election prospects.
Trump’s China-bashing strategy worked in the 2016 presidential election, and a replay could be equally fruitful. The tactic could also divert attention away from Trump’s less-than-stellar tax-reform policies. Giving the rich and corporations tax cuts has not produced the expected results, but has increased the national debt and widened the wealth-inequality gap.
Using tariffs for political purposes might not “Make America Great Again” because China (and other nations that are not exempted) could retaliate and take the US to the World Trade Organization, as in 2002 when then-president George W Bush imposed tariffs on steel. The US lost.
Retaliation
Answering a question at a press conference in Beijing on the tariffs, Chinese Foreign Minister Wang Yi commented that China did not want a trade war, but would mount a “justifiable and necessary” response, hinting a “tit-for-tat” posture. China did impose anti-dumping measures on US feed when Trump slapped a 30% tariff on Chinese-made solar panels. China might already be contemplating similar retaliatory measures on soybeans, chicken parts and other US goods.
Trump and his advisers are well aware of the damage to the American economy that a China-US trade war could bring. Indeed, US enterprises, states and major cities that are dependent on the Chinese could be more upset with Trump than China. Blocking them from the lucrative Asian market of more than 1.3 billion people would be costly and unnecessary.
The realization that a trade war would hurt the US just as much as if not more than China might be the reason the Trump administration is reaching out to China. It first invited Xi Jinping’s trusted economic adviser, Liu He, to Washington. It was probably to brief Liu on the tariff policy and allay China’s concerns.
The invitation was followed by Trump’s telephone call to Xi, briefing him on his coming meeting with North Korea’s Kim Jong-un and US-China relations. Trump, like his predecessors, understand how important that relationship is, particularly the economics of it.
Trade wars are ‘lose-lose’ propositions
Contrary to what Trump has said, history will tell that no nation has ever gained from a trade war. It was in fact protectionism that turned a recession into a Great Depression in the 1930s. Excess capacity or overproduction during the “Roaring Twenties” era coupled with a financial system that allowed banks to conduct risky investment collapsed the US economy.
Many factories and businesses were closed, sending large numbers of workers to the unemployment line, culminating in a dramatic decline in investment and consumption. In an era of balanced budgets, the government also reduced expenditures in line with falling tax revenues.
The US Congress passed the Smoot-Hawley Act in 1933 in an attempt to protect domestic industries and employment. But it backfired because other nations retaliated, causing a dramatic decrease in US exports, which were sorely needed to compensate for falling domestic demand. The rest, as they say, is history.
The US has in fact experienced the adverse effects of protectionism. George W Bush’s 2002 steel tariff cost the US economy more than 200,000 jobs, forcing him to rescind it a year later. Barack Obama’s tariff on Chinese-made tires in 2012 saved 1,200 jobs in Ohio, but cost the US economy more than US$2.1 billion in higher prices and the loss of chicken exports to China. Trump’s own 30% tariff on Chinese-made solar panels is said to have cost the US more than 23,000 jobs to save a few hundred.
In view of the above observations, the US may find provoking China into a trade war is not in its best national interest.
China not an easy target
A trade war would undoubtedly shut down or downsize some of the Chinese factories dependent on the US market, sending millions of workers on to the streets in the short term. However, most workers are from the countryside. During a trade war, they would return to their farms and villages like they did during the 2008 financial crisis.
Unemployed Chinese factory workers have a home to go to and food to eat. But where can laid-off American workers go, except sleeping on the streets or other public facilities and depending on food stamps?
In the immediate or long term, the huge Chinese domestic market, nations participating in the Belt and Road Initiative (BRI) and other countries claiming China as their biggest trade partner could absorb all the goods that would otherwise be sold to the US.
This scenario might have entered Trump’s mind, explaining why he sent his secretary of state, Rex Tillerson, to Latin America and Africa, trying to wrest them away from the BRI.
Warning of ‘neocolonialism’ found no audience
Tillerson understood that Latin America and Africa need foreign investment, but he did not want them to rely on China. He claimed that the BRI investments are really “neocolonialism,” China exploiting those two regions’ resources, creating a “debt trap” and taking away sovereignty.
However, Tillerson’s message did not gain much traction because both Latin America and Africa had benefited from Chinese investment. During Tillerson’s Latin America tour, the Ecuadoran foreign minister rebuked the top US diplomat’s warning, saying that Chinese investment spurred South America’s economic development. That response was echoed by Djibouti’s foreign minister, Mahmoud Ali Youssouf, at a joint press conference with Tillerson early this month.
Africa, Latin America and developing nations in other parts of the world have indeed benefited from and welcomed the BRI. The Chinese Ministry of Commerce has estimated that Chinese investment has created more than 1.5 million jobs in Latin America. According to South Africa’s Stellenbosch University, more than 70% of those working for Chinese companies or joint ventures in that country are local. Chinese investments ranged from resource extraction to manufacturing and services.
Unlike Western investment, that of China has no strings attached. It is simply a business transaction from which both sides benefit.
That is not to say that Chinese investments are all good; indeed, some private investors have abused workers and practiced “neocolonialism.” But these abusive companies were a small minority.
A final comment
There is really no economic or geopolitical reason for US tariffs on steel and aluminum. The only plausible conclusion is that they were imposed for political reasons, or more specifically to boost Trump’s re-election fortunes. Even than, Trump is playing with fire, risking a global economic collapse.