The Only Way to Win a Trade War Is to Not Start One
One of the biggest problems with protectionism is that when protectionists find themselves in a hole, they just keep digging deeper. The Trump Administration demonstrated that by imposing steel and aluminum tariffs on the European Union, Canada and Mexico – despite the harm its tariffs have already had on the U.S economy.
Commerce Secretary Wilbur Ross called the 25 percent tariff on steel imports and 10 percent on aluminum a “trivial increase” in the prices passed on to American consumers. Commerce secretary, meet the Chamber of Commerce. The people who run America’s businesses have an entirely different view of the matter. John G. Murphy, senior vice president for international policy for the U.S. Chamber of Commerce, has said the impact of the tariff increases “on manufacturing and construction will be substantial.”
The tariffs are a follow-up to increases that had been applied two months ago. The EU and the United States’ two NAFTA partners had been exempted for two months, but unable to squeeze the EU for concessions by its self-imposed, the Administration imposed the added tariffs on its closest trading partners. The move doubled the volume of metals imports subject to tariffs.
Proving once again that one law you can’t repeal is the law of supply and demand, U.S. steel prices have already increased the price of steel to American users. Steel prices have risen 40 percent since the start of the year, and are nearly 50 percent higher than in Europe or China. Duties on steel has already been shown to be counter-productive. When imposed by President Bush 15 years ago, they cost steel-dependant industries – which employ at least 50 times as many Americans as domestic steel suppliers – so many jobs that the tariffs had to be eliminated earlier than scheduled.
The impact of the aluminum tariffs may be even worse. So much so, in fact, that domestic aluminum producers are actually against the latest round of tariffs, which are supposed to benefit them. But as the Aluminum Association has pointed out: “We need permanent, tariff-free quota exemptions for market economies to help meet record demand for aluminum production.”
It is not hard to see the reason for the aluminum industry’s concern. Globally integrated, the U.S. industry relies on imported primary aluminum, without which they cannot meet growing demand. The need is enormous. Demand by U.S. is already at 5.6 million tons a year. But domestic capacity is limited. Last year, the U.S. industry produced less than 1 million metric tons of primary aluminum. Given capacity, it could ramp that up to 2 million tons – still far short of what they need and consumers demand. Given this, it is not hard to see why the Aluminum Association said the across-the-board tariffs could put at risk jobs in mid-and-downstream processing – which makes up about 97 percent of jobs in the industry.
The tariff increase on Canadian aluminum is especially inexplicable, given the manufacturing process’ need for massive electricity, which Canada’s abundant hydro power allows it to meet at a relatively cheap price. In fact, the U.S. buys almost half of its imported aluminum from Canada, largely because of this price advantage. The imports are clearly essential to the U.S. aluminum industry, which has shaped an integrated supply chain largely based on easily accessible, cost-competitive inputs from Canada – allowing it to transform and process the Canadian metals to the requirements of their domestic and export markets.
All of these factors will add to the costs to downstream U.S. producers, and ultimately to consumers. But that isn’t even taking into account the impact of retaliatory tariffs. The EU has already said it has no choice but to impose additional tariffs on American products, as well as proceeding with a WTO dispute settlement case. In this, they would be following up on Mexico, which yesterday announced it would respond to previous U.S. tariffs by slapping retaliatory duties on flat steel from the United States, as well as pork bellies, grapes, and apples – clearly aimed at a U.S. agriculture industry leery of taking on trading partners.
The truth is, nobody wins a trade war. The best one can hope for is to be hurt less than the other country. But that does nothing to achieve economic growth. Borders that are open to imported products and inputs do.