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Trump Unleashes the Dogs of a Trade War

Wait for the retaliation from affected countries to begin---call it mutual assured destruction.
dog fight

President Donald Trump has announced plans to impose a stiff 25 percent duty on all imports of steel and 10 percent on all aluminum. This comes shortly after he slapped heavy tariffs on washing machines and solar panels. Even those with protectionist inclinations need to know these metals aren’t the industries to protect. Few mining jobs would be saved, while the cost of finished goods will rise and encourage offshoring. And in terms of trade war, it looks to be the equivalent of Sarajevo in June 1914.

Imports make up about a third of the 100 million tons of steel used by American businesses every year, and more than 90 percent of the 5.5 million tons of aluminum. That’s a lot. But let’s be clear that, notwithstanding Trump’s claim at a 2016 campaign rally in Pittsburgh that “China is dumping steel all over the United States,” this is not about dumping (a country subsidizing exports or in some way selling them for less abroad than at home).

How do we know this?

Simple. If dumping is determined, the U.S. can and does take action. Stunningly, the U.S. already had 111 anti-dumping steel duties in effect against 32 nations as of June 2017, along with what are called “countervailing duties” against five of those countries. Were all those countries really dumping? Or has the U.S. already been impeding foreign steel sometimes under false pretenses?

As for China, by far the world’s largest steel producer and exporter, it sends almost none (directly at least) to the U.S. because they are under 24 sanctions including a massive 522 percent duty on rolled steel implemented two years ago.

The primary exporter of both metals to the U.S? As the South Park song goes, “Blame Canada!” They account for about a third of America’s steel imports, along with about half of aluminum imports. And yet Canada has not been sanctioned for unfair trade practices for either.

Rather, the White House has justified these new tariffs under the seldom-used Section 232 of the 1962 Trade Act, which allows tariffs to be imposed without congressional approval if U.S. national security is imperiled. That doesn’t necessarily imply the possibility of U-Boat interdictions. Rather the Act includes as national security:

  • loss of skills or investment, substantial unemployment and decrease in government revenue, and;
  • the impact of foreign competition on specific domestic industries and the impact of displacement of any domestic products by excessive imports.

One concern actually regards a more standard definition of national security. Just one American company, Century Aluminum, with three U.S. smelters and one in Iceland, makes the high-purity aluminum needed for such combat aircraft as the Lockheed Martin F-35 and the Boeing F/A-18 Super Hornet, plus some missiles and armor plating for vessels. That’s according to a Commerce Department report urging Trump to take action. Were Century Aluminum to shutter, the U.S. would be reliant on China and the United Arab Emirates. But slapping tariffs on all exporters of both metals to save an aluminum smelter? Better to just subsidize the company until a U.S. or Canadian smelter can be converted.

Likewise, the solar panel and washing machine tariffs were justified by findings that made no pretense of unfair trade practices, as I wrote in another publication at the time.

“We’re going to build our steel industry back and our aluminum industry back,” Trump said in announcing the tariffs. No, not likely. No more than with coal.

Yes, American steel jobs are disappearing, including those of the company U.S. Steel. In 2016, U.S. Steel announced that it was laying off a quarter of its salaried workers. And the fact is, America is simply consuming less steel. Production has remained steady since January of 2009, while imports spiked around January 2015 and since then have dropped by about half. Let that sink in. The imports that Trump wants to slap with heavy duties have already been plummeting. Another explanation for declining steel jobs is the same for so many of the jobs that Trump has promised to save from “foreigners”—automation. Machines are  producing higher-quality steel at a lower price.

Meanwhile, aluminum produced from ore has dramatically decreased from about 75 percent in 1950 to a bit over 30 percent today. That’s because post-consumer aluminum has gone from only about 8 percent in that time to about 30 percent today, while improvements within plants have allowed for the reusing of scrap to also drastically improve. Don’t blame Canada—blame recycling.

Beyond that, overall aluminum consumption last year was just slightly higher than in 2006. Double whammy. Now add in that pesky automation thing again. Triple whammy. That’s where the jobs are going.

So don’t expect much benefit to miners or smelter workers; do expect some to those who employ them. Steelmaker stocks soared right after the tariff announcement; those of companies that use steel and aluminum such as The Big Three automakers dived. Why? The auto sector accounted for 26 percent of demand for steel in the United States in 2017, and aluminum use in U.S. vehicles has increased 400 percent since 1975.

In fact, the direct jobs Trump wants to save account for 3 percent of the total aluminum industry jobs in the United States, says the Aluminum Association. The other 97 percent (about 156,000) are in “downstream industries” that take the raw metal and make something new with it. So the oil and natural gas lobbies ripped the proposed duties for clearly increasing the prices of pipes and machinery. Beverage companies like MillerCoors were hardly raising a toast either, with the drink tank Beer Institute noting that most U.S. brew is sold in cans.

Sheer speculation? Hardly. Those tariffs on solar panels are already destroying jobs of solar panel installers.

Steep tariffs almost inevitably lead to price hikes and lower sales, along with efforts to make up the difference with more automation or offshoring. Already the Mexican car industry is booming with everyone who’s anyone either building or planning to build vehicles there. Mexico is currently the fourth top exporter of vehicles globally, but there’s plenty of room to grow. At best we can expect the tariffs to be a killer for anyone considering breaking ground for a U.S. vehicle factory; at worst we can see further migration of vehicle and vehicle parts construction south. Already given the myriad cost-saving advantages of vehicle-building in Mexico it’s surprising that any vehicles are built in the U.S. at all.

Here’s where it gets really bad. Over 100 countries export steel alone to the U.S. Now add in the aluminum exporters. The washing machine tariffs were already hitting a hornet’s nest with a stick, affecting over 10 different countries. Many were contemplating counter-actions. They will now implement them.

These actions could be indirect, such as switching to a different supplier. Or they could take the form of counter-duties. But do expect a tariff war. Canada’s foreign minister said any duties would be “absolutely unacceptable,” China is reportedly considering counter-sanctions, and the European Union was left seething, declaring it will soon announce counter-measures. Not incidentally, all of these countries and entities were already hit by the earlier washing machine and solar panel tariffs.

Mexico “made it clear” that the tariffs will leave “no other option than to react,” reported the Financial Times. As it happens, Mexico’s largest source of imported steel is…the U.S., which accounts for about 35 percent. It would be poetic justice to have Mexico retaliate against Uncle Sam for for imposing aluminum tariffs by imposing its own steel tariffs.

Expect agricultural exports to get slammed, explaining why Senate Agriculture Committee Chairman Pat Roberts railed against the proposed duties in a rare show of GOP breaking ranks. “Every time you do this, you get a retaliation, and agriculture is the number one target,” he told The Hill. Agriculture Secretary Sony Perdue has also repeatedly warned of the possibility of a trade war. Fact is, most of what the U.S. exports can hardly be considered unique. Brazil produces almost as much soybeans as America does.

Yet on Friday Trump tweeted that “trade wars are good, and easy to win.” No, nobody wins. We slam them even if it hurts us, they slam us even if it hurts them, and then of course we slam them back. Call it Mutual Assured Destruction on a lesser scale. Everyone loses except the few select industries that the tariffs are protecting. In fact, Trump is already specifying counter-retaliatory measures even before the tariffs have gone into effect, much less the counter-tariffs.

As it now stands, the tariffs don’t appear nearly large enough to upend the economy, although they will have an impact with counter-tariffs and counter-counter-tariffs. Where it stops, nobody knows.

Michael Fumento is an author, journalist, and attorney. 



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