Trump's looming steel war, explained
The Trump administration may be about to tick off the world over steel.
President Trump will reportedly soon decide whether to slap tariffs of up to 20 percent on U.S. imports of steel from other countries. Tariffs on other imports like semiconductors, paper, washing machines, and aluminum could also be in the works.
A majority of White House officials apparently oppose the plan — just not Trump himself. And it set off plenty of grumbles among the world's other major economies at the international G-20 summit last week. If Trump goes through with it, officials in the European Union are looking into retaliatory tariffs on American exports in orange juice, whiskey, dairy, and other agricultural products.
Broadly speaking, there are two dimensions to this plan and its consequences: the legal and political complexities, and then any possible economic fallout.
Let's take them in that order.
If he imposes the tariffs, Trump would actually be using an odd corner of American trade law that dates back to the Cold War. It allows the U.S. to impose protectionist measures if they're deemed critical to national security. In this case, the ostensible justification would be that the military needs steel for equipment and vehicles and such, so the U.S. must have a robust domestic steel industry in case of war.
This is also where the problems start.
Trusted allies, not just the domestic industry, have historically been considered reliable sources of steel. Furthermore, the process for deciding when to use tariffs under this law usually requires months of committee hearings and knowledge gathering. That Trump is rushing the process suggests that national security is just a pretext. Instead, it is really an effort to protect U.S. steel, and everyone totally knows it. Which is why other Western countries are getting ready to retaliate.
Another justification the White House is throwing around is that China specifically needs to be punished for subsidizing its own steel exports to lower their price, and then dumping them on the international markets.
China is definitely guilty of this. Previous administrations, including Obama's, have slapped plenty of restrictions and temporary tariffs on Chinese steel as a result. But for that very reason, China's steel exports to the U.S. are already low — it's not even among America's top 10 foreign suppliers. A more accurate characterization of the problem is that China's exports drive down the price of other countries' steel exports to America.
That's why Trump may well target other countries — think Brazil, Mexico, Japan, Canada, and the European Union — as well or just impose the tariffs on everyone across the board. Which brings us back to the problem of pissing off the international community.
Now, Vox's Zeesham Aleem pointed out that Trump could have yet another strategy in mind here: using the threat of tariffs on everyone to force other Western countries to get tougher on China together. But the White House has a big self-created problem there, too: "Trump's constant reversals, ambiguity, mixed signals, and outright hostility to following through on U.S. commitments on everything from trade deals to military alliances have destroyed trust in the U.S.'s ability to actually fulfill its pledges."
Basically, Trump is trying to game the rules of international trade agreements in a way that American allies will find particularly obvious and insulting. And they don't find him credible enough to trust U.S. commitments anymore.
But what of the economic merits of those agreements? Even if it's sure to piss off our trade partners, is this still a good idea for American jobs?
Well, as I mentioned, the more targeted a tariff is, the less likely it is to do anything for U.S. jobs. Just go after Chinese steel, and domestic producers will still be undercut by cheap imports from other countries. Meanwhile, tariffs on all steel imports only apply to steel. You may create jobs in the U.S. steel industry, but by definition, you're also raising the price of steel for American consumers. So you gain jobs in steel, but maybe lose them in industries that use steel, like car manufacturing.
So Trump's jobs goal would be better served by more comprehensive tariffs on all imports. But the closer he gets to that, the more likely he is to blow up international trade agreements entirely and spark a full-blown trade war. Now, American exports to the rest of the world make up just 12.5 percent of our economy, while the portion is much higher for most other Western countries. So they'd have far more to lose from a trade war than we do. But it still wouldn't be pleasant.
Even many left-wing economists who agree with Trump on the effects of trade think tariffs work best as shots across the bow: temporary and targeted measures to punish specific countries for bad behavior. They're not well-suited to forcing systemic changes in trade relationships.
If systemic change is Trump's ultimate goal (and it should be) he could use countervailing currency interventions to fix systemic imbalances between the U.S. dollar and other currencies. Or he could negotiate directly with other governments — as previous administrations have successfully done — to get them to adjust the value of their currencies relative to ours. Both movies would shrink the trade deficit, and thus increase the amount of American demand going to fuel domestic job creation.
Alternatively, Trump could accept that large trade deficits give the federal government enormous room to borrow without consequence. The stimulative effects of bigger federal budget deficits are actually a natural corrective to the job-sucking effects of trade deficits. Trump could use that fiscal freedom to create jobs and bulk up domestic industries like steel with domestic industrial policy.
Many centrist analysts have fallen into the habit of treating even the whiff of protectionism as a terrible idea with inevitably apocalyptic consequences. But while Trump may be wrong about many things, he's right that America's trade relationships harm American workers.
Unfortunately, precisely because Trump is wrong about many other things, his solutions tend to be terrible.