How Will Trump’s Tariffs Affect U.S.-China Relations?

Arguing that America is harmed by other countries’ trade practices, President Donald Trump said on March 1 that the U.S. will impose a new 25 percent tariff on imported steel and 10 percent tariff on imported aluminum. “People have no idea how badly our country has been treated by other countries,” Trump said. Although China is the world’s largest producer and exporter of steel, it is only the 11th largest exporter of steel to the U.S., and the fourth largest exporter of aluminum to the U.S. —The Editors

Comments

Derek Scissors

There are punitive actions the U.S. should take in response to predatory economic behavior. Section 301 retaliation against coercive Chinese technology practices, for example, would be justified and could be valuable. But the Section 232 announcement, if implemented as the President outlined, is severely flawed.

First, it will not create a large number of net jobs. More expensive imports could boost U.S. output of steel and aluminum, but it will discourage U.S. output of aircraft, buildings, and cars. Any foreign retaliation will also hurt employment. Making inputs to American production more costly works the same with steel as it would with oil—it’s the government arranging an income transfer from users to makers.

The President may believe in a fixed relationship between the trade balance and jobs. There isn’t one, but even if there were, a 25 percent steel tariff will reduce our deficit by only 1-2 percent, because steel is secondary in the trade deficit. The aluminum tariff will do less. And that’s ignoring potential falls in American aircraft exports and rises in American auto imports due to these sectors becoming less competitive.

An across-the-board tariff is a good response to Chinese transshipment of steel and other goods. The downside is it targets responsible trade partners. This may stem partly from the President’s view that any country running a bilateral trade surplus is taking advantage of us, including allies, as seen in remarks concerning Korea. Countries that subsidize steel output may be hurting us. But cheaper steel made overseas on a market basis is no different than cheaper steel made in the U.S.—inefficient steel-makers lose, everyone else wins.

All of this applies to antidumping and countervailing duties. Invoking national security with Section 232 brings further problems. One is obvious: other countries could also justify trade barriers with national security. If steel and aluminum are important to security, aircraft and semiconductors surely are. These are U.S. export mainstays. It’s possible foreign countries will cite food as vital to national security and target American agriculture.

More subtle but still troublesome is the emerging Trump administration use of national security. It may be a stretch to consider steel and aluminum to be vital. There is no national security justification at all for a global tariff without consideration of secure foreign supplies in case of an emergency. There may be economic reasons to target Canadian aluminum; there are no national security reasons.

Meanwhile, the administration has not yet taken a position on Singapore’s Broadcom trying to acquire Qualcomm, which would make U.S. supplies of advanced telecom equipment far less secure. It appears 232 does not represent a more demanding view of national security but is instead political. Politicizing national security is more dangerous than politicizing trade.

The best news from the President’s announcement is the lack of immediate action. If the tariff is really for all countries and all steel and aluminum, it could have been applied immediately. We can reasonably hope the final version of 232 will have many exceptions.

Donald Clarke

I agree with much of Derek Scissors’ analysis, but would add two points that much of the commentary I’ve read seems to overlook.

First, the theory of international trade on which these tariffs is at least partly based is fundamentally worse than flawed; it is absurd. As a recent tweet (and others before that) shows, President Trump literally believes that a trade deficit of $X means you are losing $X on trade. Under this theory, if I buy a something worth $100 from you for $50, and you buy only $10 worth of things from me, I am running $40 trade deficit with you (true) and I am losing $40 by trading with you (of course, false; I am actually $50 better off). Yet that is the theory that apparently now drives U.S. trade policy, and that is why the President thinks that the “problem” can easily be solved by simply having less trade with countries that have a bilateral trade surplus with the United States.

Second, few people are addressing the WTO implications of these tariffs. There appears to be a widely shared misconception that countries can get out of their WTO obligations simply by invoking the concept of national security. Not so. The national security exception contained in Article XXI of the The General Agreement on Tariffs and Trade (GATT) is actually quite narrow and cannot plausibly be stretched to cover the steel and aluminum tariffs.

It may be that domestic U.S. law allows the President to unilaterally raise tariffs for any reason that he chooses to label “national security”-related. But that does not mean he may do so without violating the U.S.’s WTO tariff commitments. This violation would be like any other violation: aggrieved WTO members could bring a complaint before the WTO’s Dispute Resolution Body (DSB), and eventually (assuming the DSB also believes it is a violation) it would have the choice of eliminating the tariffs or accepting DSB-sanctioned retaliatory measures from the affected countries. That’s the way things are supposed to work. But since the U.S. has shown such a cavalier disregard for WTO norms in the first place, it’s hard to see why its trading partners should wait for the WTO’s dispute settlement process to work itself out before taking retaliatory measures—and indeed, it appears they have no plans to wait. In short, it appears we may be reverting back to trade relations governed not by rules but by economic and political clout—an ironic regression, given that it was the United States that was a prime mover behind the rule-governed dispute settlement regime of the WTO.

Ryan Hass

If the White House implements the across-the-board steel and aluminum tariffs that President Trump previewed March 1, there will be clear winners and losers. China will be a winner. The United States will be the loser. Here’s why:

First, the real pain from the tariffs will be inflicted on the United States closest trading partners, not China. Trump had the option of exempting key trading partners from tariffs, but opted against it. As a result, many of America’s key partners will be hit hardest, because they are America’s largest sources of steel imports—Canada, Mexico, South Korea, Japan, Germany, and Taiwan. China, by contrast, is not a leading supplier of steel to the United States. By hurting the very partners whose support the United States would need to mount an effective, multilateral strategy for dealing with China’s unfair trade practices, President Trump is shooting America in the foot.

Second, the decision will hurt America’s economy, not help it. Various models have suggested the decision will place a $12 billion drag on the U.S. economy and have a net negative effect on American jobs. The decision likely also will motivate retaliation from leading steel and aluminum-exporting countries, meaning that top U.S. exporters likely will suffer the consequences. It’s no wonder that major U.S. stock indices fell on news of the announcement.

Third, by making a flimsy case for using national security as a basis for tariffs, Trump will set a precedent that other countries likely will follow. If the United States arbitrarily decides that national security justifies protection for its steel and aluminum industry, there’s every reason to expect that other countries will apply a similar logic to aircraft or semiconductors or agriculture in their countries in the future.

Fourth, by attracting the ire of much of the rest of the world, Trump has unwittingly helped Beijing deflect heat away from itself. Beijing in recent days has been the focus of international news coverage for its decision to lift constitutional term limits for its president and vice president, raising concern about a drift toward entrenched authoritarianism. Even before that, China’s unfair trade practices had been the subject of international focus, with growing scrutiny of its subsidization of key industries, lax protections of intellectual property, and shielding of key sectors from foreign competition. With his announcement, Trump has pulled the global trade narrative to Washington, allowing China to escape the spotlight and the opportunity to claw back moral high ground as a champion of globalization. Expect Beijing to become more vocal in making the case that the United States—not China—is the real threat to the world trading system.

Trump has created distance between the United States and its partners, sapped America’s economic competitiveness, set a dangerous protectionist precedent, and given Beijing a reprieve from international scrutiny over its trade practices. Unfortunately, this decision has undermined American interests, dimmed American influence, and relieved pressure on China. Let’s hope cooler heads prevail before President Trump’s unscripted words become enacted in policy.

Paul Burke

The U.S. soy industry will not speculate on the potential impacts of Chinese government trade actions on President Trump’s political base. However, if the Chinese government does move to restrict access for U.S. soybeans, citing trade actions taken by the White House, it will have a negative impact on prices received by the over 400,000 U.S. soybean farmers, while increasing the prices paid to Brazilian and other world soybean producers. This message was conveyed to the Trump Administration in a letter from the American Soybean Association and the U.S. Soybean Export Council (USSEC) on February 23rd.

USSEC has been engaged in direct communications with Chinese and U.S. government trade officials encouraging them to offer policies and programs that, President Xi has described as “making the cake of cooperation bigger” and that will result in a “win-win” for both of China and the United States, as opposed to retaliatory trade actions that could negatively impact family famers in the USA and the soybean processing and animal production industries in China.

USSEC has provided U.S Ambassador Branstad with talking points on the issue of restricting market access for U.S. soybeans and encouraging the U.S. Government to ask their Chinese counterparts to demonstrate a desire to solve the trade imbalance by stepping up their purchase of U.S. products, such as U.S. Soybeans. USSEC has put forward the same message through its social media communications to Chinese government and industry officials.

USSEC’s direct communications to the Chinese government and soybean industry stress that for 35th years the U.S. soy industry has actively invested to “making the cake of cooperation bigger” by:

Transferring technology and management expertise to modernize Chinese livestock, poultry, aquaculture, feed and crushing industries to be more efficient, more profitable and more sustainable by organizing educational and exchange programs on animal nutrition and farming/production management;
Providing risk management training and trade servicing to help Chinese importers, feed ingredient traders and integrators to better manage price risks using risk management tools achieving more stable and profitable business operations;
Engaging in government to government efforts in improving the quality of U.S. soybeans to China through various activities including vessel comparison study and the recent Systems Approach between AQSIQ and APHIS to reduce weed seeds in U.S soybean shipment contributing to China’s ongoing effort of Supply-side Structural Reform be more successful;
Launching domestic U.S. initiatives to improve soybean quality with higher and better protein and oil content to supply the increasingly sophisticated needs of the Chinese industries;

The U.S. soy industry is proud of it contributions to China’s goals of achieving sustainable food security and food safety and remain optimistic the over 400,000 U.S. soybean farmers will not be targeted by China for restricted trade actions on the part of the U.S. government.