Trump Tariffs On Aluminum And Steel Likely To Backfire

The goals of protecting workers and bolstering domestic industry might be all good and well, but when it comes to the tools the Trump administration is using, they’re going about it the wrong way.

Announced with little advance notice last week, all signs suggest that the US’ plans to enact heavy tariffs on incoming steel and aluminum are likely to create a massive hangover. President Trump is going to slap a 25 percent tariff on incoming steel and a 10 percent tariff on incoming aluminum; the tariffs will reportedly take effect in several weeks and exempt Canada and Mexico for the indefinite future. The measures are to be enacted via the rarely-used Section 232 of the 1962 Trade Act, under the argument that current trade realities threaten US national security.

Unfortunately, the nature of the global economy and the industries in question mean that these tariffs will only harm the industries and consumers they’re intended to help by stoking an unnecessary trade war, harming relations with key allies, and damaging the US economy. For all free trade’s shortcomings, a closer look at these proposed tariffs reveals the truth: they are pure folly.

Stirring up a trade war

Even for those who are against free trade and support a “home field advantage” of subsidized US industry as suggested, for example, by Pat Buchanan in his 2001 book Where The Right Went Wrong, these tariffs just aren’t logical. For one thing, in return for at most a short-lived boost to the US metals industry, they’re set to hit other vital national industries that are highly dependent on export markets.

Take, for instance, agriculture. As the second-largest buyer of US food and farming exports, China has the power to have a major impact on American goods, such as soybeans, of which China is the world’s biggest customer and the US is the largest supplier. Indeed, some experts suggest that due to Trump’s latest volley, China may instead turn to Brazil as their main source of soybean exports – which could cause massive harm to US farmers. According to the USDA, a reduction of 1% in the US soybean market share would equal half a billion dollars in lost sales.

Such a move isn’t so unlikely. After all, Beijing has already taken swipes at another key US agricultural export – sorghum – by opening an anti-dumping and anti-subsidy investigation in early February. The move was widely seen as a shot across the bow following Washington’s earlier imposition of tariffs on solar panel and washing machine imports and its investigation into Chinese aluminum alloy sheet.

It’s not only China that is willing to hit America where it hurts in response to new tariffs. The EU – the world’s third-largest overall importer of agricultural products behind the US and China – has also made it clear that it won’t accept Trump’s tariffs without putting up a fight.

On Friday, European Commission President Jean-Claude Juncker invoked the possibility of imposing tariffs on flagship US exports like Harley-Davidson motorcycles, bourbon whiskey, and blue jeans. The following day, Trump tweeted that if the EU did carry out retaliatory tariffs, then he would hit back in turn by enacting tariffs on European cars – raising the possibility that Brussels would hit back once again in an ongoing cycle of tit-for-tat. The problem is, such a scenario is one in which nobody wins.

Hitting America’s friends

As for news that America’s northern neighbor, Canada will be exempted for the indefinite future, that actually will render these tariffs essentially useless at least from the US domestic industry perspective.

Canada is the largest exporter of steel and aluminum to the US and as the buyer of 50 percent of US steel sold abroad (in contrast with China, which only makes up 1 percent of US steel imports), Canada stands to lose a lot from an unnecessary trade war with America. And though Canadians might be known for their politeness, it wouldn’t be wise for America to rub their hockey stick the wrong way: Ottawa could easily petition for sanctions via the WTO or employ counter-tariffs in response to any US trade restrictions. It makes sense that Trump exempted them, but whether or not Canada was exempted either option basically nullifies these tariffs.

The mutual animosity has also raised the stakes in what are already bitter discussions over the renegotiation of NAFTA. Indeed, some experts say that Trump is simply dangling the threat of steel and aluminum tariffs over Canada and Mexico in order to get them to agree to the US’ terms of the deal. It’s already been announced that Canada and Mexico’s exemptions are conditional upon NAFTA renegotiation. This really isn’t subtle. The problem is, such an approach with two of America’s closest allies could brew far more resentment than they’re worth.

How exemptions could backfire 

 

Exempting Canada from these tariffs shows why they are a bad idea in the first place.

Take, for instance, the example of aluminum. Even if Canada were given an exemption and shipped all of its unwrought aluminum stateside, if American smelters that are currently inactive were all fired up again, there still wouldn’t be enough unwrought aluminum to fulfill the basic needs of US manufacturers and consumers. In fact, if Canada is left out, the proposed aluminum tariff would only indirectly help Canada’s aluminum industry – to the detriment of the US’ – by ensuring their much-needed aluminum keeps flowing south at a steady rate. Quite simply, the US doesn’t have enough bauxite, alumina or cheap electricity to repower its aluminum industry enough to meet national demand.

After all, there’s a reason major US aluminum companies like Alcoa have packed their tent and moved many of their factories to countries like Iceland: electricity is way cheaper there. In fact, low-population nations like Canada, Norway and Iceland are each individually on track to produce more aluminum this year than the entire US, which has only eight aluminum plants still open – suggesting that Trump’s grand plans to rebuild US aluminum are no more than rhetoric.

As a result, even selectively applied tariffs will still end up being causing a net loss for America: if they are not applied universally, then US consumers will basically be subsidizing Canada and other exempted nations instead of actually bolstering domestic US industry. These tariffs are all about pro-American-worker rhetoric without any real substance.

A wiser option

Rather than going further down this road, the US would be much better off taking measures such as directing specific anti-dumping legislation at trade violators and taking firm lines on overproduction and dumping – especially when it comes to negotiations with countries that are not full free market economies, such as China. China’s state-subsidized steel and aluminum industries allow it to dump and transship (sell under different nations). China’s sheet and plate aluminum and steel are sold cheaply around the world, undercutting other countries. Congress could also take action by prioritizing retraining or benefits programs to assist laid-off steel and aluminum workers and help them get back into the workforce.

In short, even those who are anti-free trade need to avoid a knee-jerk nod of approval and think about how this really will play out: angry countries brainstorming how to leverage punitive measures against the US economy, confused allies wondering what Trump might do next, layoffs in many steel-using industries and higher prices in US stores. Is that really worth any short-term gain from higher tariffs?

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Brian Paul is a freelance journalist who’s reported for BBC, Reuters, Foreign Policy and contributed to The Federalist, The Week, The American Conservative, among others.