On March 8, US President Donald Trump announced high tariffs on imported steel and aluminum, 25% and 10% respectively, which incurred fierce negative responses domestically and internationally.
A looming tit-for-tat trade war with other countries will benefit the US economically (but less than Trump expects), but harm the US politically.
An analysis by The Economist predicts that increases in the price of steel and aluminum under these tariffs will, in the short run, create 33,000 metal-working jobs and destroy 179,000 metal-dependent ones. So The Economist said Trump is screwing over two Rose Bowls of people for the sake of one Fenway Park.
According to the US Tax Foundation’s estimate, if 2018 imports equal 2017 levels, Trump’s tariffs on steel and aluminum could bring nearly $9 billion in tax revenue for the federal government, and will cost US companies nearly $9 billion in return. The value of imported steel totaled just over $29 billion in 2017. When the 25% tariff is levied on the same level of imported steel, the tax will total roughly $7.3 billion. Similarly, when a 10% tariff is applied to the $16.8 billion worth of aluminum imported in 2017, the tax will total nearly $1.7 billion. The US government’s total federal tax revenue in 2017 was approximately $1.32 trillion. The proportion from the steel and aluminum tariffs will therefore be very small.
If some countries, such as Canada and Mexico are exempted at the first round, the taxation will be minimal, while the new tariffs proposed by the Trump administration far exceeds the tax benefits from the recent expansion of Section 179 expensing provisions for small businesses in the Tax Cuts and Jobs Act. Finally, some small manufacturing companies will find that the benefits they gain from the expensing provision will be erased by the increased costs from the new tariffs.
Obviously, Trump’s high tariffs on steel and aluminum can only bring very limited benefits for the US, but they will do more harm to the world. An estimate by the Center for Strategic and International Studies in Washington D.C. says Trump’s policy will cost US trade partners a loss of $14.2 billion. The most affected parties will be Canada ($3.2 billion), the EU ($2.6 billion), South Korea ($1.1 billion), Mexico ($1 billion), and China ($0.69 billion). A Brookings assessment predicts that if other countries fight back and levy high tariffs too, it will push the global tariff level up by 10%, and reduce US GDP by 1.3%, with most other countries suffering a 1-4.5% reduction in GDP. This confirms the statement trade wars have no winners.
Worse still, Trump’s unilateral high tariff policy shakes up the international trading system, which underpins its global influence. The US has been the chief architect of the world economy and trade system since the end of the Second World War, after all. The core of the system is the rules-based free trade, which brought great prosperity, though more and more deficiencies have been exposed since the 2000s.
What Trump is now doing is to change the rules-based order system to an “America First” order system. Trump’s economic philosophy of trade is a zero-sum game. Trump’s first National Security Strategy retreats from most of the fundamentals of the US’s global leadership and discards the values of “mutual respect, negotiation, openness, [and] common prosperity” that US has protected since the Second World War. One of biggest merits of the world trade system is that all countries can do business without concerns. But now other countries fear for their own interest and worry about a foreign country taking away what they have.
The US badly needs imported steel and aluminum, and doesn’t produce enough. The decrease in US steel and aluminum production is the result of comparative advantages and the division of global labor. But Trump blames it all on unfair trade. The real intention behind the high tariffs on steel and aluminum is to use them as bargaining chips. Actually he made it clear that the reason the US exempts Canada and Mexico is to push them to reach a “new and fair” updated NAFTA. In the context of “America First” rule, the US is the only one who gets to determine what’s “new and fair”. This means Trump is openly soliciting bribes from its two neighbors as a precondition for doing business as usual.
Bullying is Trump’s approach, and he uses threats frequently and arbitrarily. What’s more, Trump is using Section 232 of the Trade Expansion Act of 1962, which provides for action based on a threat to national security. He claims the WTO can’t adjudicate. If other countries also follow his approach, the WTO will lose one of its most important roles as a dispute settlement platform.
Now the world trade system is in peril. If Trump continues damaging the system, it will inevitably make world economic growth slower and riskier. The world and the US itself will soon feel serious pain.