Trump’s Tariffs: Who, What, Where, and Why

Trump’s Tariffs: Who, What, Where, and Why

So this is how a trade war begins.

President Trump’s decision last Thursday to go ahead with tariffs on imported steel and aluminum has engendered lots of angry statements and press releases from other countries, many of which will likely enact tariffs on US products in retaliation. While Mexico and Canada were quickly granted exemptions from the tariffs – at least while NAFTA renegotiations are ongoing – other allies were left in the lurch, and responded accordingly – none more so than the European Union, which pressed the US, in private discussions and public comments, to rethink the tariffs, or at least exempt EU countries from its effects.

On Friday, the EU released a list of US products that could face tariffs, should Trump not exempt the bloc. Among them are products, like whiskey and motorcycles, that would seem to target the home states of congressional leaders like Mitch McConnell and Paul Ryan.

Trump has already threatened several times to tax European car imports if the EU responds with retaliatory tariffs: “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars.” The US is the EU’s largest market for cars, importing more than 1 million cars from Europe. Additionally, many of these European brands, including BMW and Mercedes, have opened factories in the US that employ American workers: a third of the BMWs sold in the US are made here as well.

The EU has also indicated a willingness to take the US to court at the World Trade Organization (WTO), and to possibly do so collectively, alongside other spurned US allies.

The response from other allies has been similar, if slightly less vigorous:

Brazil, the second largest steel exporter to the US, has expressed “enormous concern” over the tariffs. Brazil is also the largest importer of US metallurgical-grade coal (which it uses, ironically enough, to fuel the furnaces used in steel-making) and could opt to import coal from other countries instead, a move which would of course weaken demand for US coal, an industry the Trump administration has been seeking to jumpstart. For now, Brazil is hoping to receive an exemption, a la Mexico and Canada, and, barring that, take the case to court at the World Trade Organization (WTO).

Japan believes the tariffs will have a “big impact” on its close bilateral ties with the US. Per Japanese trade and industry minister Hiroshige Seko: “I don't think exports of steel and aluminum from Japan, which is a US ally, damages US national security in any way, and we would like to explain that to the US.” Japan has indicated they will work within the WTO to respond to the tariffs, tabling meetings with the European Union (for now) to discuss fighting the tariffs together.

Striking contrast: Trump’s tariff announcement came the same day that the eleven remaining members of the Trans-Pacific Partnership signed the agreement.

South Korea’s finance minister, Kim Dong-yeon, responded to the tariffs with a relatively diplomatic statement, considering the country is the third-largest exporter of steel to the US: “We will make clear what our stance is…[The government] will deploy all possible means to respond to US steel tariffs measures and make an all-out effort.” South Korea also indicated a willingness to file a complaint with the WTO.

What about China?

It’s not exactly a secret that one of the intended target of the tariffs is China, which (among other economic hijinks) overproduces steel it then sells at bargain rates that other nations can’t compete with. It’s likelier than not this is the opening salvo in a trade tussle between the world’s two largest economies.

As Reuters reports, the US ran a record $375 billion trade deficit with China last year, “which made up two thirds of a global $566 billion trade gap.” [Emphasis mine.] In addition to Trump’s tariffs, the White House is pressing China to cut that gap by about $100 billion.

So the question is: how is China reacting to the tariffs?

Well, predictably. China, the world’s second largest economy and biggest exporter of steel, is “resolutely opposed” to the tariffs and is warning of the dangers of a trade war to both the US and itself. The country’s foreign minister, Wang Yi, is threatening a “justified and necessary response,” and its commerce minister, Zhong Shan, seemed to directly refute previous statements by President Trump when he told reporters that “there are no winners in a trade war…nobody wants to fight a trade war, and everyone knows fighting one harms others and does not benefit oneself.”

Despite such statements, there are indications China is warming up to the idea.

China Investment Corp. (CIC), the nation’s sovereign wealth fund, sold off its stake in Blackstone, one of the US’s largest hedge fund groups. CIC had been invested in Blackstone since 2007 and had ridden out several large drops in the group’s value, notably in the first couple of years – which coincided with the Great Recession – when Blackstone shares plunged 89 percent before rebounding. The shares have since increased nine-fold.

China has also started shedding its holdings of US Treasury debt, after spending much of 2017 buying it up. As CNN notes, “China’s holdings of US government debt fell to a six-month low of $1.17 trillion in January.” Stephen Innes, head of Asia Pacific trading at investment firm Oanda, told CNN that “US treasuries are often used as a carrot during the political ping-pong match when trade tensions escalate.”

Quick analysis:

The tariffs illustrate President Trump’s unilateral approach to issues and countries, and the dangers inherent in doing so. Other agenda items – notably a resolution to the decades-long conflict with North Korea – are at risk, now that Trump has alienated South Korea, Japan, and China, nations that are utterly crucial to any deal with North Korea.

How did this all start?

Short answer: America first.

Longer answer: it’s long been a goal of Trump’s to bring various manufacturing industries back to the US and so, citing potential national security concerns, the Commerce Department launched an investigation last April under the rarely-deployed Section 232 of the Trade Expansion Act of 1962 – this sounds serious, but essentially, it allows the president to set tariffs – normally Congress’ responsibility – if imports threaten national security.

Despite objections from Defense Secretary James Mattis, (now former) Secretary of State Rex Tillerson, and (now former) National Economic Advisor Gary Cohn, the Commerce Department investigation found that steel and aluminum imports did indeed pose a threat to national security.

This gave President Trump the justification he needed for his tariffs, and within three weeks of the Commerce Department’s recommendations, Trump had announced them.

The fight in the White House over tariffs had been a vigorous one, with Commerce Secretary Wilbur Ross and trade advisor Peter Navarro supporting tariffs and stoking Trump’s protectionist instincts. Mattis, Tillerson, and Cohn, meanwhile, argued against protectionist policies, claiming they would hurt the US economy and touch off a global trade war.

After Trump went ahead with the tariffs, Cohn resigned, and Tillerson lost his job, via an announcement made on Twitter, shortly after.

Smart read: this piece in the Washington Post about how Peter Navarro, long exiled by Gary Cohn, returned to become the face of Trump’s trade policy.

What effect will these tariffs have on US industries?

We’ve done this before, and the results were overwhelmingly negative.

Former president George W. Bush introduced steel tariffs back in 2002 at the behest of US steel-makers but ended up getting rid of them after a year. Bush’s steel tariffs are estimated to have led to the loss of 200,000 American jobs during their year of implementation, as rising steel costs affected other manufacturing industries that require steel. In fact, the number of Americans who lost their jobs was higher than the total number of jobs provided by the US steel industry itself.

While Trump’s tariffs may be beneficial to the estimated 300,000 steel and aluminum workers in the US, the tariffs will likelier than not raise costs for steel and aluminum components required in related industries. Automobile manufacturers, oil companies, appliance makers, construction companies and beer brewers, to name a few, will be impacted.

When steel and aluminum prices go up, as they almost certainly will, the demand for the products produced in these industries will likely drop, causing a ripple effect throughout the economy and an almost certain loss of jobs in related industries which, by the way, employ roughly 6.5 million Americans.

It’s basic economics: when demand drops, so too will profit, and the companies in these industries will find it difficult to maintain their payrolls.

A report from the Center for Automotive Research warned against the tariffs: “American consumers would buy fewer vehicles if prices were to rise at a rate commensurate with materials cost share and the tariff impact.”

As you can then imagine, the US steel-and aluminum-consuming industries have come out against the tariffs, warning that the only result will be higher steel and aluminum prices. Per a joint statement issued by the Precision Metalforming and National Tooling and Machining associations: “The U.S. will become an island of high steel prices that will result in our customers simply sourcing our products from our overseas competitors and importing them into the United States tariff-free.”

While exempting Canada from the tariffs has softened the impact of increased steel and aluminum costs on the beer industry, beer brewers have expressed their concern about the tariffs. The industry relies on aluminum for canning beer and steel for kegs and brewing equipment. Per Brewer’s Association president Bob Pease, whose organization represents craft brewers: “We are concerned about the steel tariff equally to the tariff on the aluminum… It’s a 25% tariff, so it’s more dramatic.” Commerce Secretary Wilbur Ross has argued that the tariffs would not be a big issue for companies that require aluminum for canning, claiming the price increase would only amount to pennies per can. However, 115 billion aluminum cans were made in the US last year, so an increase of $0.01 per can would cost more than $1 billion dollars.

These tariffs have also led to the biggest schism to date between Trump and Republicans.

Many members of Trump’s own party have come out against the tariffs, including Trump ally and typically cautious House Speaker Paul Ryan: “There are unquestionably bad trade practices by nations like China, but the better approach is targeted enforcement of those bad practices. Our economy and our national security are strengthened by fostering free trade with our allies.”

Another of Trump’s Republican allies, Senator Orrin Hatch, also came out against the tariffs, calling them “a tax hike the American people don't need and can't afford.”

Republican Senator and Trump-gadfly Jeff Flake is pushing a bill in the Senate to override the steel and aluminum tariffs, adding he would not back any exemptions put forward by Trump: “The problem is, when you say, ‘All right, let’s have tariffs. But let’s couple that with uncertainty,’ that’s almost worst. I mean, those are dual poisons to the economy… You know, tariffs are awful. Tariffs married to uncertainty is probably even worse.”

Even more notably: 107 House Republicans sent a letter to Trump, expressing “deep concern” about the tariffs and urging him to narrow their scope.

Interestingly, Trump has gained support from some Democrats, including West Virginia Senator Joe Manchin, who said it was “past time to defend our interests, our security and our workers in the global economy and that is exactly what the president is proposing with these tariffs.”

Still, the vast majority of responses to the tariffs and their implementation have been negative. Former Treasury Secretary Jack Lew, echoing the view of many of America’s friends and allies that the reasoning behind the tariffs does not make sense, said, “The idea that you can undermine core ally relationships, which have been the most enduring source of mutual defense, in the name of a national defense decision? It just doesn’t make any sense.”

header image: the white house /  flickr (modified by eric fershtman)

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