The US – Between Protectionism and China

The United States will not implement the new tariffs on steel and aluminum right away

At the beginning of this month, President Donald Trump announced the imposition, “for a long period of time,” of tariffs – 25 percent on imported steel and 10 percent on aluminum – on the grounds that both items are entering the country at very low prices, which puts domestic production and national security at risk.

The additional protection for the two industries, which employ some 100,000 workers, is bad news for the U.S. economy, and by extension, for the rest of the world, for various reasons.

The decision makes domestic industries that utilize the two raw materials less competitive. This includes the automotive, aerospace, energy, electronics, beer, soft drink, candy, soup and pharmaceutical industries, among others, which employ on the order of 6.5 million workers. Going forward, they will have to pass on the increased tariffs to consumers. In addition, “negative protection” will be imposed on these industries, in the face of competition from the rest of the world, for their sales in the U.S. as well as in other markets.

Clearly, from a political point of view, the reasoning is the opposite, because the industries now being protected are located in areas where Trump nailed down his victory in the 2016 election.

Another argument against raising tariffs is the eventual retaliatory actions that the affected countries may take, posing the risk of a “trade war,” an unpleasant memory in world economic history. To make things worse, a few days after his decision, Trump boasted that such wars “are good, and easy to win.”

The European Union has already announced that it is prepared to impose some $3.5 billion in tariffs on imports coming from the United States, a sum equal to its affected steel and aluminum exports. They point to products like Harley Davidson motorcycles, Levi’s jeans, bourbon, orange juice, tobacco and cranberries, which come from the electoral strongholds of important Republican and Democratic legislators. But Trump immediately doubled down, threatening to impose tariffs on European auto imports.

To make things worse, barely a week after the initial announcement, Trump not only confirmed the increase in the two taxes, but made the whole thing more complicated as well.

For now, the new tariffs will not be levied on imports coming from Canada and Mexico, as long as negotiations underway with the two countries lead to an agreement that is satisfactory for U.S. interests. Australia was also exempted, presumably because of the political rapport between the countries.

But in addition, Trump left the door open to further exceptions for other allies and for certain steel and aluminum products that are not available in adequate quantity or quality in the United States.

Predictably, domestic importers and countries that want to be included among the exceptions are lining up. The European Union, Japan and South Korea hurried to plead their traditional security alliances with the United States; Brazil noted that they only export intermediate goods to the U.S. market; and so on.

As this article went to press, it appeared that the United States will not implement the new tariffs on steel and aluminum right away on imports coming from the EU and other allies. Thus, for now, the tariffs will have only marginal application, on a minimum level of imports.

Within this complex framework, it turned out that at the last minute, President Trump was on the brink of approving new tariffs on the import of some 100 products from China, to compensate for the economic damage caused by their misappropriation of technology and intellectual property. Among the possible products were textiles, clothing, games, furniture, electronics and telecommunications. In addition, there will be new announcements about restrictions on Chinese investment in the United States and about a hardening of the requirements for issuing visas to enter the country.

If confirmed, these measures should be seen from a wider perspective on the protectionist impulse driving the increases in the steel and aluminum tariffs. What we have here is a confrontation between today’s major world economies.

The friction between them was there already after Bill Clinton’s presidency, but until now, successive U.S. administrations have only raised various complaints about China’s failures to fulfill promises of reform. Now, it appears that the relationship is becoming more adversarial.

In anticipation of this, Chinese authorities have already warned about the beginning of a possible trade war, with retaliatory measures on imported cars, soybeans, aircraft and other products, aimed in particular at impacting areas that form the electoral base of important Republican politicians.

The world’s major economies, then, are on the brink of a trade war. It appears that the United States and its allies may be able to avoid a clash for now over the new tariffs on steel and aluminum. But everything indicates that the confrontation between the United States and China will be serious.