The domestic and diplomatic costs of picking trade fights
“HOW am I going to compete?” asks Sohel Sareshwala. He runs Accu-Swiss, a Californian company making customised components for the manufacture of semiconductors and cars. President Donald Trump’s tariffs on steel and aluminium, both of which he uses as inputs, are eating into his profit margins and delaying his orders. Meanwhile, Mr Sareshwala’s competitors abroad, free of such concerns, can undercut him.
Mr Sareshwala is not alone in his frustration. On June 1st Mr Trump extended tariffs to countries that supplied 81% of America’s steel imports and 96% of aluminium imports in 2017, arguing that this was necessary to protect national security. Tight quotas apply to most of the rest. Only Australia was let off, perhaps because of a friendship between the president and Greg Norman, an Australian golfer, who lobbied on his government’s behalf. Mr Trump’s tariffs and quotas have drawn a chorus of disapproval from American buyers of metal, the governments of Mexico, Canada and the European Union, and anyone concerned about the health of the rules-based system of world trade.
Plenty of business people besides Mr Sareshwala are finding that inputs are dearer and scarcer. Tariffs, imposed or threatened, have dulled foreign competition and pushed up the price of American-made metal. On June 5th hot-rolled steel cost $329 per tone more in America than in western Europe, according to data from S&P Global Platts, a price-benchmark provider. The gap for aluminium was $290. The tariffs work like a tax, leading to more expensive bridges, pipelines, cars and beer cans. The quotas make planning nightmarish. When South Korea’s were announced, some categories had already been filled.
Disquiet among the consumers of affected products is no surprise. More surprising is the resistance from those the tariffs are supposed to help. Though it at first supported tariffs, the United Steelworkers, a trade union, denounced them when they were unveiled because they included Canada, whose metalworkers happen to be members of the union too.
The Aluminum Association, an industry body, also weighed in. Its head, Heidi Brock, labelled Mr Trump’s decision an “unfortunate outcome”. Ms Brock had hoped that any measures would be aimed at tackling Chinese subsidies and overcapacity. Instead, because 97% of the American industry’s jobs are in aluminium processing, and supply chains cross back and forth in North America, the tariffs are a headache for her members.
More pain is on the way. America’s trading partners are promising tariff retaliation that could affect as much as $43bn of its exports (see chart). They have picked products ranging from motorcycles to pork (see article). Retaliation adds to worries that Mr Trump will harm America’s economy not help it. Taking both his trade restrictions and retaliation by others into account, Joseph Francois, Laura Baughman and Daniel Anthony of the Trade Partnership, a consulting firm, estimate that for every job in steel and aluminium gained, 16 would be lost elsewhere.
Trade diplomacy is likely to be damaged, too. Mr Trump is supposedly still trying to renegotiate the North American Free-Trade Agreement (NAFTA) with Canada and Mexico. On June 5th Larry Kudlow, his economic adviser, insisted that the president was not planning to withdraw from it. But talks are stalled and Mr Trump’s tariffs are diminishing the pact’s value. NAFTA includes special conditions that its members must meet before attacking each other with tariffs; when President George W. Bush imposed broad steel tariffs in 2002, America’s NAFTA partners were therefore spared. Mr Trump is doing his best to show that while he is in charge, such conditions count for little.
America’s offended allies are showing unusual unity. Collectively, their response looks larger than the biggest authorised by the World Trade Organisation (WTO) since its founding in 1995. But its nature is more notable than its size. Normally, WTO dispute-resolution panels hear legal arguments and issue a ruling before plaintiffs retaliate. But although the EU and several countries have filed formal cases, they seem unlikely to wait for the WTO’s blessing this time.
The quarrel falls into a legal grey area. The Trump administration is claiming that it is acting in the name of national security and that no WTO judge should be able to question a country’s own assessment of that right. Canada, China, the EU, India, Japan, Mexico and Turkey all say that Mr Trump’s national-security claim is phoney. America is instead “safeguarding” its industry. Under WTO rules, they say, that gives them the right to retaliate. (Canada and Mexico can claim different retaliatory rights under NAFTA.) All these claims can and will be disputed.
Not that Mr Trump would pay much attention to an adverse WTO ruling on his national-security claim. His administration is strangling the WTO’s dispute-settlement body anyway, by blocking the appointment of new judges. He prefers raw power to rules. Retaliation, even if it bends the rules, may remind Mr Trump of the dangers of a power-based system and a united opposition—even though that is a risky stance for those who believe that rules are paramount. “Is this the beginning of the end of the international trading system?” asks Luis de la Calle, a Mexican former trade negotiator. “I say this is the beginning of the defence of the international trading system.”