How Trump’s tariffs could hand trade leadership to China

FAN Editor

President Donald Trump said he wants to “protect our country and our workers” by placing stiff tariffs on imported steel and aluminum. But the move risks ceding U.S. global economic leadership to China for years to come, some analysts and experts are warning. 

“If implemented, the steel and aluminum tariffs would represent one of the most lopsidedly self-destructive U.S. trade policy decisions in recent memory,” Ryan Hass, a fellow at Brookings Institution’s John L. Thornton China Center and the Center for East Asia Policy Studies, wrote in an email. 

Other experts agree with that assessment. Charles Hankla, an associate professor of political science at Georgia State University, wrote at the economic website The Conversation that the policy is “dangerous for the U.S. economy and for the international system.”

Hankla added, “If the U.S. abdicates as champion of the international trading system, China may be the only country that can take the reins. The question is, what would that mean for the current system of open and free markets?”

Mr. Trump on Friday seemed resolute to take that step, tweeting in support of trade wars, even after warnings from governments including China, Mexico, Canada and the EU.

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he tweeted.  “Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

That didn’t sit well with most global trading partners, including China.

“In recent years, the global economic recovery has been sluggish and the steel and aluminum industries in various countries are facing difficulties,” China’s foreign ministry spokeswoman Hua Chunying said during a briefing Friday. “All countries should cope with the situation together and work with each other to explore solutions instead of taking trade restrictions unilaterally and profiting oneself at the expense of the neighbor.”

The U.S. is the world’s biggest steel importer. Last year, China was the 11th biggest steel exporter to the U.S., according to the Department of Commerce’s International Trade Administration. China has been accused of flooding the market with cheap exports. Yet steel and aluminum make up just more than 2 percent of total U.S. imports, according to Capital Economics.

There’s more at stake than metal industry-related jobs. China was the top U.S. trading partner in 2017, according to U.S. Census figures. The country also held the most in U.S. debt at the end of 2017, according to the U.S. Treasury, at $1.18 trillion, ahead of Japan’s $1.06 trillion and Ireland’s distant $326.5 billion. 

Hass added, “The tariffs will hurt the U.S. economy, cost U.S. jobs, and create inflationary pressure. By doing harm to U.S. allies, this action also undermines America’s ability to attract support for an effective, multilateral strategy for dealing with China’s unfair trade practices.”

In essence, Hass noted, Mr. Trump “has given China a gift.”

On Friday, markets seemed to agree, sinking for a second day. Boeing (BA), consistently the biggest U.S. exporter, fell 5 percent. Sales to China accounted for $11.9 billion, or about 13 percent of the company’s total sales last year. Boeing in September raised its forecast for the Chinese market to $1.1 trillion over the next 20 years. That’s up from $1 trillion for the same forecast a year earlier. 

Aluminum is a key ingredient in aircraft manufacturing. Boeing and European rival Airbus may soon be facing a rival from the Commercial Aircraft Corp. of China in the form of that country’s C919 jet. Its first delivery is planned for 2021.

Mr. Trump had been urged by top economic adviser Gary Cohn and national security officials including Secretary of State Rex Tillerson to wait while the economic team continued to examine the implications of such a decision. CBS’s Margaret Brennan was told last week that Mr. Trump simply “ran out of patience” with the delays and decided to make the call.

The president informed the press of his decision and, for the first time, publicly announced the 10 percent and 25 percent rates. Republican allies on Capitol Hill had not been given prior notice. 

“In a normal political situation, these strong rebukes from industry, allies, and his own party, including direct opposition from the Speaker of the House, would dissuade the President from moving forward with such plans. However, this is not a normal situation and the future is less predictable.” wrote Clayton Allen, an analyst at Height Capital Markets. 

He added, “In the short term, we are watching the willingness of Congressional leaders, especially from the House side, to push back on the President’s trade agenda. Over the longer term, chief economic advisor Gary Cohn’s continued presence (or resignation) will signal the future direction of the President’s larger trade agenda.”

Cohn “lobbied hard against tariffs, and his departure would indicate that the administration is set on an aggressively protectionist path on upcoming trade matters,” Allen noted.

U.S. Commerce Secretary Wilbur Ross defended the policy during an appearance on CNBC Friday.

“In a can of Campbell’s Soup, there are about 2.6 pennies worth of steel. So if that goes up by 25 percent, that’s about six-tenths of 1 cent on the price on a can of Campbell’s soup,” Ross said. “I just bought this can today at a 7-Eleven … and it priced at a $1.99. Who in the world is going to be too bothered?”

Some analysts, including the conservative-leaning Tax Foundation’s Erica York, noted that the George W. Bush administration in 2002 put tariffs on steel imports using a different section of trade law. The World Trade Organization eventually ruled against the United States.

“Though that measure was withdrawn, one study quantified that during the short-lived tenure of that steel tariff, 200,000 Americans lost their jobs as a result of higher steel prices,” York wrote. “There are real concerns that placing tariffs on steel and aluminum would damage economic growth and invite retaliation that could extend to other commodities, such as agricultural produce.”

The White House is citing section 232 of the Trade Expansion Act of 1962 in implementing the new policy. It gives the president authority to restrict imports and impose unlimited tariffs if a Commerce Department investigation finds a national security threat.

Such an idea was first “bandied about last summer,”  wrote Peter Boockvar, the chief investment officer at the Bleakley Advisory Group, in an email.

“I never thought the possibility was worth thinking or writing about because how can the authors of it be so stupid,” he wrote. “I laughed. `National security’ concerns? Really? We import 25 percent of our steel needs from Canada and Mexico.”

He added, “Now that it is a growing reality it’s important for all to understand (which the market clearly understands) that it will hurt more industries and employees than it will help. There seems to be a scary level of economic ignorance of the defenders of this policy. “

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