A cure way worse than the disease
The Trump administration has issued its long-awaited report on steel and aluminum imports, and, as expected, the document calls for new tariffs and quotas to protect domestic industry. Excess production capacity in both commodities is a global concern, exacerbated by the subsidies and other preferential treatment that China provides its producers.
Nevertheless, Commerce Secretary Wilbur Ross' proposed cures are likely to be worse than the disease — for all of the usual reasons that tariffs and quotas generally prove counterproductive, and some new ones, too. For the sake of guaranteeing market share for a minority of companies that produce steel and aluminum, the measures will raise costs on the vast majority of companies and households that, directly or indirectly, consume those products.
That's just Economics 101. Where Ross' proposals break new ground, and not in a good way, is in the rationale behind them. His report invokes the alleged harm to U.S. national security from "excessive" imports of steel and aluminum, under a U.S. statute, Section 232, that has previously been used only twice — to limit oil imports from Middle East adversaries Libya and Iran.
This is potentially pernicious in two ways: First, it's not a very honest statement of the economic realities. Defense factories use only about 3 percent of all steel produced in the United States; meanwhile, much imported steel and aluminum come to the United States from countries with which we have mutual-defense treaties, such as Canada, South Korea and Japan. Good relations with the last two are especially crucial to U.S.led efforts aimed at North Korea's nuclear program, making it doubly inexplicable, and insulting, that the Trump administration would pick a trade fight with them now.
Second, and perhaps more serious, actual enforcement of Ross' recommendations could undermine the entire structure of international trade law, carefully built over decades by presidents of both parties. Specifically, the law allows countries to raise trade barriers for reasons of national security, without being liable to World Trade Organization discipline, on the understanding that they will do so only rarely, in cases of genuine need.
To use national security as a pretext for garden-variety protectionism, as the Trump administration seems to be doing now, invites tit-fortat behavior by other trading nations. If it gets out of hand, the global recovery could go into reverse.
Ross' recommendations for each metal give President Donald Trump three choices: global tariffs, a global import quota or a more focused tariff concentrated on selected countries deemed to be the worst offenders in terms of "dumping," such as China. Friendly countries could appeal for, and probably get, exemptions.
Still, this would only mitigate, not eliminate, the harmful potential impact. Prices would still go up; other nations would still have an incentive to retaliate against American exports; and the United States would still be guilty of twisting long-standing principles of international trade law for the short-term benefit of its own politically favored industries.
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