President Donald J. Trump signs the Section 232 Proclamations on Steel and Aluminum Imports. The start of a trade war?

The good, the bad and the ugly of a trade war

With President Trump signing an executive order that places a 25% and 10% tariff on steel and aluminum respectively, many fear it might be the start of a global trade war.

Are trade wars good as Mr. Trump says, or bad as many others say, and how ugly will it get from here on?

The executive order

The executive order that President Donald Trump promised to sign and has signed, imposes a tariff rate of 25 percent on all steel and a 10% rate on all aluminum coming into the U.S.
He kept the door open for neighbors Canada and Mexico by exempting them — provided that the U.S. gets what it wants in talks to revamp the North American Free Trade Agreement — and signaled he might do the same for other allies.

What is a trade war?

A trade war as described by the business dictionary:

A conflict between two or more nations regarding trade tariffs on each other. This type of conflict usually arises because the nations involved are trying to improve imports or exports for its own country. Trade wars have the potential of increasing the costs of certain imports if the nations involved refuse to make a compromise.

In other words, this fits perfectly with what is close to happening now. The imposing of tariffs or additional taxes on imported goods is nothing new though. Just this January, the U.S. did this for solar panels and washing machines. Europe too has increased tariffs, on solar panels and steel from China. But one tariff increase is not the other. The WTO system has “safeguards”1https://www.wto.org/english/docs_e/legal_e/25-safeg_e.htm that allows tariffs such as these under two conditions. These are:

  1. “A product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions, as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products.”
  2.  “Safeguard measures shall be applied to a product being imported irrespective of its source.”

What Trump is doing now is unseen. He calls on national security to introduce import duties. In the eyes of the EU, the tariffs are an economic safeguard measure in disguise, not a national security measure. If this really is the case, the EU can use the WTO safeguards to impose tariffs of their own.

Retaliation from the rest of the world

The EU already has a list of 100(+) U.S. products worth 2.8 billion euros ($3.46 billion) on which it could apply a 25 percent tariff. This list of American goods did not come out of thin air. Europe chose these products to hurt Trump and his supporters in the U.S. as much as possible.

The choice for a tax on Harley-Davidson engines, for example, is no coincidence: the factory is in Wisconsin, the home state of Paul Ryan. Bourbon whiskey is also on the list. That product comes from Kentucky, the home of Mitch Mc-Connell, the fraction leader of the Republicans in the Senate. Orange juice is a processed agricultural product that is mainly produced in Florida, traditionally a so-called swing state where Democrats and Republicans each have very few elections.

Believe it or not, it’s not the first time, the US pulled this. The list that leaked yesterday is reminiscent of 2002. During George W. Bush’s stay in the White House, he also decided to increase import tariffs on steel.

China’s foreign minister, Wang Yi, vowed a “justified and necessary response” to any efforts to incite a trade war. So it’s expected that China will follow in the EU’s footsteps and also impose tariff’s of their own.

Can a trade war actually be good?

Not really, at least if history is an indicator of success or failure. When George W. Bush tried to save the steel industry in 2002 by raising tariffs on select steel products, U.S. gross domestic product declined by $30.4 million, according to the U.S. International Trade Commission 2https://www.usitc.gov/publications/safeguards/3632/pub3632_vol3_all.pdf.

More jobs were lost than saved. The states he sought to help suffered instead. As a result, the tariffs were overturned.

How ugly it can get

The Smoot-Hawley Act 3https://www.bloomberg.com/view/articles/2018-03-08/a-u-s-china-trade-war-will-be-very-tactical-at-least-for-now passed by Congress in 1930 is a prime example of how ugly it can get. It’s often blamed for the deepening of the Great Depression.

The law increased U.S. tariffs by an average of 20 percent. The taxes originally were proposed to protect American farmers. Unfortunately, many other industries lobbied for and won similar protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade completely plummeted.

In conclusion, what is unfolding now might only be the beginning. It’s too soon to really talk about a trade war, but if the EU can push through, Mr. Trump at the weekend already threatened 4https://www.ft.com/content/496f1036-1e3f-11e8-aaca-4574d7dabfb6 to raise tariffs on European cars if the EU retaliated. US trade officials declined to comment beyond that on the EU’s proposed tactics.

Sources:

References   [ + ]

1. https://www.wto.org/english/docs_e/legal_e/25-safeg_e.htm
2. https://www.usitc.gov/publications/safeguards/3632/pub3632_vol3_all.pdf
3. https://www.bloomberg.com/view/articles/2018-03-08/a-u-s-china-trade-war-will-be-very-tactical-at-least-for-now
4. https://www.ft.com/content/496f1036-1e3f-11e8-aaca-4574d7dabfb6
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