Retaliation is costly and risky. But rolling over would be worse
OF ALL President Donald Trump’s assaults on multilateralism, his trade policy is the most relentless. On June 1st his administration expanded tariffs of 25% on steel and 10% on aluminium to include imports from allies: the European Union, Canada and Mexico. The tariffs are justified by “national security”, a ruse to render them legal at the World Trade Organisation (WTO). The White House may not stop there. It is investigating whether imports of cars and car parts also pose a “threat”. America’s allies are brandishing their own lists of levies on American imports, as is China. Should they strike back?
The arguments against retaliation are clear. A tit-for-tat trade war will unleash destructive mercantilism, which lurks everywhere, not just in the White House. Even in good times, politicians usually forget that the main benefits of trade are higher productivity and cheap imports. Instead, they keep tariffs low chiefly to open foreign markets for their hard-lobbying exporters. The more barriers they encounter abroad, the less value they will see in supporting the global trading system. Decades of progress towards freer trade could unravel.
But doing nothing entails costs, too. Mr Trump’s goals go far beyond tariffs on a few metals. He seeks trade terms that will force supply chains to move to America, damn the economic consequences. For example, the administration wants the North American Free-Trade Agreement (NAFTA) to expire automatically after five years, robbing firms of the certainty they need to invest in Mexico. To roll over on tariffs today would invite further, more damaging assaults tomorrow.
There are no good options. But on balance, it is better to try to deter Mr Trump now, while the scale of the dispute is small. Countries should organise their response so that it has maximum effect at minimum cost.
They should act in unison and within the spirit of the rules-based system. Condemnation of America’s actions by the rest of the G7 on June 2nd was a first step. Countries are also right to complain about the tariffs to the WTO. The rules may yet permit retaliation; the idea that Mr Trump’s tariffs have anything to do with national security is laughable; and it would smack of double standards for retaliators to defend the multilateral system while circumventing it.
Any retaliation should be carefully calibrated. It is sensible to target symbolically important goods. Mexico has imposed tariffs on bourbon and pork, which are produced in states that are home to Republican leaders. Canada plans to tax imports from swing states, such as chocolate from Pennsylvania and orange juice from Florida. Mr Trump’s trade policy is already unpopular among Republicans in Congress, some of whom are trying to curtail the president’s power to act unilaterally on trade. America’s allies should aim to weaken the remaining support for protectionism.
Retaliatory tariffs should be structured so as to do as little economic damage as possible at home. That means omitting goods for which there are few available substitutes, as well as parts and components. Otherwise, supply chains will be put at risk and governments will probably be drawn into the business of picking winners. To see how easily that happens, witness the thousands of requests by American importers for exemptions from Mr Trump’s steel and aluminium tariffs.
Bully pulpit
The Economist was founded in opposition to tariffs and mercantilism. Barriers to trade distort economies and harm consumers, especially poor ones. Yet, in the long run, a measured show of strength in the face of Mr Trump’s aggression offers the best hope for keeping markets open.