U.S. vs. the world: Here’s what a trade war looks like

WASHINGTON — President Donald Trump is expected to finalize big new tariffs on imported steel and aluminum as soon as Thursday, making good on years of fiery threats to confront allies and rivals alike on trade policy.

The expected move has unsettled stock markets and scrambled political alliances, with Republican leaders like House Speaker Paul Ryan, R-Wis., criticizing the tariffs and Democrats like Sen. Sherrod Brown, D-Ohio, talking them up. Trump’s top economic adviser, Gary Cohn, who reportedly opposed the tariffs, resigned over the issue.

The new tariffs will impact the American economy for better and worse and could touch off a trade war abroad, with other countries already threatening to respond in kind. Here’s what you need to know.

Trump maintains tough stance on tariffs0:30
U.S. vs. the world: Here’s what a trade war looks like
U.S. vs. the world: Here’s what a trade war looks like

autoplay autoplay

What is Trump doing?

While the White House has not officially announced its plan and observers are eagerly awaiting the details, the president has said he intends to impose a tariff of 25 percent on steel imports and 10 percent on aluminum imports.

The initiative comes after the Commerce Department, led by Secretary Wilbur Ross, released a report declaring that current levels of steel and aluminum imports threatened national security and recommending tariffs and quotas on imports to protect the industries at home. Under Section 232 of the 1962 Trade Expansion Act, the White House can take action to confront such threats, but it’s been invoked only rarely to confront oil crises in the ’70s and ’80s.

Who do tariffs help?

The immediate beneficiaries are likely steel and aluminum companies, which will now be able to sell their product at cheaper prices in the U.S. relative to foreign competitors. U.S. Steel announced it would send 500 idled workers to an Illinois plant in response to Trump’s plan.

The industry has long complained that it’s been undermined by overproduction of steel in China, which the Commerce Department says is “by far” the largest contributor toward 700 million tons of excess steel capacity worldwide. While China represents only a small fraction of steel imports to America, critics say it and other countries distort the global market by subsidizing cheap steel in order to build up their industry at home and muscle out rivals abroad.

“We put those duties in place and we can help industries recover,” Robert Scott, an economist at the Economic Policy Institute who is broadly supportive of the tariffs, told NBC News. “It leads to more investment, it leads to increasing employment.”

Who gets hurt?

Companies that rely on steel and aluminum to make their products, from auto manufacturers to construction firms, will face higher costs that could cause them to raise prices or cut jobs. Beer companies, which use aluminum in their cans, are livid.

Like most brewers, we are selling an increasing amount of our beers in aluminum cans, and this action will cause aluminum prices to rise. It is likely to lead to job losses across the beer industry. (2/3)

— MillerCoors (@MillerCoors) March 1, 2018

Since there are vastly more businesses that use steel and aluminum rather than produce it (the American Iron and Steel Institute estimates there are 140,000 jobs in the industry), most economists expect the tariffs to hurt growth, if only modestly.

But the bigger fear for the economy isn’t the tariffs — it’s what other countries might do in response and whether it leads to a broader trade war.

What’s a ‘trade war’?

Trade is based on reciprocity. Countries agree to lower tariffs together and when one throws up a new barrier, their trading partners have the option to respond in kind. That means the United States could be vulnerable to retaliation if it goes ahead with tariffs, which other countries are likely to challenge as a violation of existing agreements.

The European Union is already weighing its own 25 percent tariffs on $3.5 billion of iconic American products in politically sensitive U.S. states.

“We will put tariffs on Harley-Davidson, on bourbon and on blue jeans, Levis,” European Commission President Jean-Claude Juncker said in a German TV interview.

But Trump’s position is that its tariffs are justified, which means the White House could declare everyone else’s retaliation illegitimate and escalate tariffs further. Trump, who said recently that “trade wars are good” on Twitter, has already threatened Europe with a tax on imported autos in response.

“If it does get out of hand to some degree, where there’s tit-for-tat with a lot of countries, it will have some impact on the economy,” said Claude Barfield, a trade policy scholar at the American Enterprise Institute.

In addition to affecting goods that are hit with tariffs, the uncertainty created by a trade war could spook investors, who worry about fallout. A company might think twice about opening that factory to roll out a new product line for European markets if they are concerned that European countries are about to throw up a bunch of tariffs.

Has it happened before?

There hasn’t been a full-blown, no-holds-barred trade war since after World War II, when countries began opening up their markets and joining international agreements. The free trade movement, led by the United States, was in part a response to the Great Depression, in which economists blamed a global cycle of tariffs for prolonging the downturn.

But there have been plenty of smaller disputes over tariffs and trade barriers, including over steel.

George W. BushGeorge W. Bush

George W. Bush speaks at a forum sponsored by the George W. Bush Institute in New York on Oct. 19.Seth Wenig / AP

In 2002, President George W. Bush imposed steel tariffs as high as 30 percent in response to a surge of imports. Japan and European countries challenged their legality at the World Trade Organization, which ruled against the United States, and Bush ended up withdrawing them in 2003 before the countries acted on their threats to retaliate.

Bush declared victory at the time, saying steel companies had gained time to reorganize. But advisers concluded that the tariffs had also been a drag on the economy, costing it more in jobs than they were worth.

“The results were not what we anticipated in terms of its impact on the economy or jobs,” Bush’s chief of staff at the time, Andy Card, recently told the Washington Post. The United States International Trade Commission issued a report estimating the tariffs had reduced overall GDP by about a negligible $30 million.

Have presidents tried this before?

Probably not like this.

For one thing, Bush exempted certain products from allies like Mexico and Canada, which imports the most steel into the U.S., and it remains unclear if Trump will grant those two trading partners or other allies carve outs to his tariffs. On Wednesday, White House Press Secretary Sarah Huckabee Sanders said it was possible those nations could be granted exceptions but she made no commitment.

Trump’s team also includes more prominent trade skeptics and the president has been far more hostile to free trade in his rhetoric than Bush or any other postwar president, which could inform the administration’s future moves and raise tensions with allies.

The nature of the White House’s legal complaints is also different than in the past in an important way. The Bush administration cited a provision of trade law allowing the White House to respond to a sudden increase in imports. The Trump administration is invoking national security as the reason for the tariffs, which trade experts say is unusual and harder for other countries to legally challenge before the WTO.

Few countries are likely to accept Trump’s stated rationale, but the president could set a precedent for rivals like China to make similar security claims to justify tariffs on anything from minerals to agriculture.

“It has not been litigated, ever,” said Julian Arato, an Assistant Professor at Brooklyn Law School who researches trade policy. “If you push this far enough, you risk undermining the system.”

Similar Posts