The Risks of U.S. Steel and Aluminum Tariffs

Workers at a steel plant in Shandong province, China, in July 2017. Reuters

President Trump argues that tariffs are necessary to protect U.S. national security, but many experts argue that the measures could backfire.

Last updated March 8, 2018

Workers at a steel plant in Shandong province, China, in July 2017. Reuters
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Current political and economic issues succinctly explained.

Introduction

In March 2018, President Donald J. Trump announced he will apply across-the-board tariffs, or import taxes, on steel and aluminum. Trump argues that the measures are necessary to protect U.S. national security, which he claims has been degraded by the decline of the domestic steel and aluminum industries.

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Many economists, however, say that previous experience shows that such tariffs will likely fail to revitalize domestic producers while imposing costs on the rest of the economy. Meanwhile, trade experts worry that the tariffs—25 percent on steel and 10 percent on aluminum—could set off a trade war that could ensnare some close U.S. allies, such as Canada, and undermine the global trading system.

Why is Trump taking these actions now?

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Protecting American industry, especially steel, was a centerpiece of Trump’s 2016 campaign. “It will be American steel that will fortify America’s crumbling bridges,” he said on the stump. Steel employment has fallen from nearly 650,000 workers in the 1950s to some 140,000 today, with many of the closed mills in swing states such as Pennsylvania.

Many steel and aluminum producers around the world have long blamed the Chinese government for subsidizing production of the metals in violation of global trade rules, which many analysts say has flooded the global market with low-cost product and sent prices plunging. U.S. producers have clamored for protection from such “dumping” via tariffs or quotas, which previous administrations have provided in limited cases.

Trump’s planned tariffs, however, are potentially much broader. The president has the authority to apply them under a national security, rather than purely economic, rationale, based on a little-used 1962 trade law. In April 2017, the Commerce Department began an investigation into whether steel and aluminum imports “impaired national security.” It concluded in early 2018 that they did. This opened the door for Trump to apply tariffs as he sees fit. Trump’s announcement came little more than a month after he applied broad tariffs on solar panel and washing machine imports to protect domestic producers.

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How could it impact U.S. industry?

Many large steel and aluminum producers cheered the tariffs. The American Iron and Steel Institute thanked Trump for “addressing the steel crisis,” and the second-largest American aluminum producer, Century Aluminum, said the measures will spur them to increase domestic investment.

However, most economists say that the tariffs are unlikely to help U.S. producers. They point to previous attempts to protect the steel industry that have failed to arrest the sector’s decline, and they say that innovation in the industry, not imports, are primarily to blame for lost jobs. Declining demand for steel is another major factor, with U.S. consumption falling almost in half since the 1970s.

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Source: U.S. Commerce Department.

Economists also warn that tariffs, which will raise the cost of steel and aluminum, will hurt the many industries that use those metals, costing jobs and increasing prices for consumers. This could include automakers, aircraft manufacturers, beer and soda companies, the energy industry, and the construction sector. Together, these industries employ far more people than do steel and aluminum producers. Manufacturing groups have said Trump’s measures will cost thousands of jobs.

How do Trump’s proposals differ from past tariffs?

A number of previous presidents imposed tariffs or other trade barriers to protect U.S. industry from cheap foreign imports. Presidents Lyndon B. Johnson, Richard M. Nixon, Jimmy Carter, and Ronald Reagan applied either quotas—import limits—or price floors on steel. Economic studies have concluded that these measures did little to stop the decline of the industry.

More recently, the administrations of George W. Bush and Barack Obama both applied steel tariffs. Bush imposed broad tariffs of up to 30 percent on steel imports in 2002. These were meant to last three years but were withdrawn early, after the World Trade Organization (WTO) ruled against them. Some research has shown that these tariffs cost the U.S. economy as many as two hundred thousand jobs. Meanwhile, Obama applied tariffs of up to 522 percent on some Chinese steel in 2016.

The Commerce Department also regularly applies targeted antidumping duties on specific steel products that it finds benefit from unfair subsidies; there are over a hundred such trade remedy actions currently in place.

But economists say that Trump’s proposal is different. Trade expert Chad P. Bown calls the policy “unprecedented” in both its scope and legal justification. Previous tariffs targeted specific countries, such as China, or included exemptions for close allies, as Bush’s did. Trump says his tariffs will apply to all countries.

Further, Trump’s use of a national security law to implement the tariffs is extremely unusual, though Bown notes that Reagan used the same law for more limited purposes. While normal trade actions follow public investigations, Trump’s process was opaque. The law also gives the president total discretion over how and for how long to apply the tariffs, unlike other trade actions, which are based on economic conditions and subject to periodic review.

What are the risks to global trade?

Trump’s actions, especially if they are applied broadly rather than targeted at offending countries, run the risk of sparking a cycle of retaliation—a trade war.

Some of Washington’s closest allies would be hardest hit. The largest exporter of steel to the United States is Canada. Germany, Japan, and South Korea are also among the top–ten exporters, and China is only the eleventh largest. Canada called the tariffs “absolutely unacceptable,” while top European Union officials said they are developing plans to retaliate. Some European companies said they were putting U.S. investments on hold in response.

Retaliatory tariffs could put other U.S. industries in jeopardy as well. China is already reviewing whether to restrict imports of American wheat and soybeans in response to previous tariffs, and experts say Beijing could expand that policy to other major U.S. imports, including technology, aircraft, and intellectual property.

What is the role of the WTO? 

Economists warn that Trump’s appeal to national security could undermine the framework of trade rules painstakingly constructed after World War II. Other countries could challenge Trump’s tariffs at the WTO, but that body’s rules include exemptions for national security measures, a loophole that has rarely been exploited. Legal experts say it is unlikely that the Trump administration would lose such a case.

U.S. allies have argued instead for a united front against Chinese overproduction.

A WTO challenge could have several unintended consequences, analysts say. If Trump were to lose, he could ignore the ruling, undermining the WTO, or he could withdraw the United States from the institution altogether, which he has previously threatened to do. On the other hand, if he were to win, it could open the door to other countries using the national security exemption, potentially escalating protectionism.

This, in turn, could relieve pressure on China, whose own subsidies and other trade distortions have been a major target at the WTO dispute forum. If national security were to become an accepted rationale for protectionism, Beijing could increase its own discriminatory practices and further block U.S. imports and investment. U.S. allies have made this case, arguing instead for a united front against Chinese overproduction.

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