By: Sara Skejo, CASE Analyst
In a controversial move, seen by many as a declaration of a trade war, on March 8th United States President Donald Trump signed a pair of proclamations setting up new import tariffs on steel and aluminum. The new tariffs will amount to 25% on steel and 10% on aluminum, ostensibly to counter cheap imports and protect domestic manufacturers.
Mr. Trump’s authority to impose the tariffs is based on a provision that allows the president to restrict trade because of national security interest under Section 232 of the Trade Expansion Act of 1962. The argument behind the new import tariffs is that the current ones weaken internal economy, thus posing a threat to national security. The primary source of this threat, according to Mr. Trump, is China.
The Trump administration has long criticized China for flooding the market with cheap commodities. However, although the country is indeed the world’s largest steel exporter, it is only the 11th-largest import partner of the US, accounting for 2% of total imports of steel. In 2016, the US implemented trade taxes on different types of imported steel, causing Chinese exports to the US to drop by two‑thirds. In the first nine months of 2017, the US imported 26.9 million tons of steel, an increase from 22.5 million tons in 2016. Canada accounted for the largest share of imports (16%), followed by Brazil (13%), South Korea (10%), Mexico (9%), and Russia (9%). Nevertheless, the American steel industry has argued that China has a backdoor to the US markets through transshipment, whereby third-party countries buy Chinese steel and modify it before exporting to the United States. As no legitimate data on transshipment is available, though, the actual scale of this practice is difficult to determine.
The situation looks quite different in case of aluminum. In 2017, Chinese aluminum exports went up by 4.5% from 2016 and grew by more than 25% in the first two months of 2018. The United States accounts for 14% of China’s total aluminum exports. Between January and October 2017, the US produced only 840,000 tons of aluminum and imported more than 5.7 million tons; out of those, 550,000 tones came from China, a number dwarfed only by imports from Canada, Russia, and the United Arab Emirates.
China’s Minister of Commerce, Zhong Shan, said that China did not wish to fight a trade war, but it would take proper measures to defend its rights and interests. If China does retaliate, it could focus on consumer electronics or semiconductors that would affect Apple and US chipmakers like Qualcomm and Intel. The country is also a big importer of commodity crops like soybean, and farmers in the US have already felt constrained by a decline in prices.
Some of US trading partners are expected to be excluded from the new tariffs. However, only Canada and Mexico would be initially granted an exemption, an arrangement that could be extended based on the progress in the North American Free Trade Agreement (NAFTA) talks. The European Trade Commissioner Cecilia Malmström said that the European Union will also seek to be excluded from proposed measures, or it will impose new tariffs on products including orange juice, bourbon, denim, cranberries, peanut butter, and motorcycles. The EU has also said it would challenge the legality of the US metal tariffs at the World Trade Organization (WTO).
Following this announcement, Mr. Trump ramped up his rhetoric and threatened to respond with a new tax on cars, should the EU retaliate to his proposed steel taxes and put into effect new trade barriers. The US vehicle market is in an upturn mode, and it is also one of the world’s most important sales markets. Import taxes on cars would be especially problematic for Germany, Europe’s number one automotive market both in terms of production and sales, which accounts for around 30% of all passenger cars manufactured and 20% of all new registrations in the EU. German Chancellor Angela Merkel called her fellow European leaders and Mr. Trump for negotiation amid fears of a tit-for-tat trade war that would cause prices to rise and damage economic growth. According to the German Association of the Automotive Industry (VDA), the German vehicle-makers exported 494,000 cars in the value of EUR 19.4 billion and sold 1.35 million light vehicles in the United States last year. BMW, Daimler and Volkswagen operate some of their biggest factories in the southern, Republican-leaning states. German manufactures employ 36,500 people in the US and German automotive suppliers about 80,000 more.
With the announcement of the new duties, the US has rolled out the most sweeping protectionist tariffs in decades, all in the name of national security. America’s free trade agreements, such as the NAFTA, the US-Korea Free Trade Agreement and even the US’ membership in WTO are being questioned. The looming trade war could hurt the economy and financial markets; following the announcement of new tariffs, Wall Street has been on the edge as the Dow Jones Industrial dropped 420 points, while both Nasdaq and S&P 500 declined by 1.3%. Shares of Boeing fell by 3%, General Motors by 4% and Ford by 3%. But, perhaps more importantly, it also hurt the already strained diplomatic relations between the US and many of its allies. And that could prove a security threat much more serious than low trade tariffs on aluminum and steel.