US China Trade War
It will all be just so easy.

President Trump has his trade war, but it is not just against China. This trade war is the United States against the World. President Trump has announced tariffs of 25% on steel imports and 10% on aluminum imports under Section 232 of the United States’ National Security law. It is important to note that because Section 232 is not a trade exception (such as Section 201 or antidumping and countervailing duty cases) approved by the World Trade Organization, other countries have the right to retaliate and retaliate they will. Of this I am certain.

Many countries around the World, including the EU, Canada, Mexico, and China, immediately threatened trade retaliation against U.S. exports.  Europe is talking about tariffs on U.S. exports of Harley Davidson Motorcycles, Jack Daniels Bourbon and blue jeans. China is talking about tariffs on U.S. agricultural exports, such a sorghum grain and soybeans.

To see the advice the President is getting one has to look no further than the statements made last month by United States Trade Representative, Robert Lighthizer on Fox News about how it is ridiculous to think that the United States will get into a trade war with China and other countries over Section 232 cases. But the reaction of numerous countries to Trump’s announcement of tariffs on Steel and Aluminum imports shows Lighthizer’s statement was itself ridiculous. Lighthizer is Trump’s principle advisor on trade laws and trade agreements and this statement shows how badly he and the Trump Administration have misjudged the situation.

The major problem is that Lighthizer and Trump are focusing too much on the trade deficits and not enough on the enormous amount of U.S. exports. The United States exports roughly $2.4 trillion in goods and services per year so there are plenty of targets for retaliation.

On March 2, 2018, President Trump tweeted, “trade wars are good, and easy to win.”  But like pretty much all wars — both trade wars and real wars — the most common result is that no one really wins and everybody loses.

Both the Wall Street Journal and Investors Business Daily disagree with the Trump trade war. In an editorial entitled, Trump’s Tariff Folly, the Wall Street Journal Editorial Board wrote how these new tariffs on aluminum and steel will harm the United States both economically and diplomatically:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms. The Dow Jones Industrial Average fell 1.7% on the news, as investors absorbed the self-inflicted folly.

Mr. Trump has spent a year trying to lift the economy from its Obama doldrums, with considerable success. Annual GDP growth has averaged 3% in the past nine months if you adjust for temporary factors, and on Tuesday the ISM manufacturing index for February came in at a gaudy 60.8. American factories are humming, and consumer and business confidence are soaring.

Apparently, Mr. Trump can’t stand all this winning. His tariffs will benefit a handful of companies, at least for a while, but they will harm many more. “We have with us the biggest steel companies in the United States. They used to be a lot bigger, but they’re going to be a lot bigger again,” Mr. Trump declared in a meeting Thursday at the White House with steel and aluminum executives.

No, they won’t. The immediate impact will be to make the U.S. an island of high-priced steel and aluminum. The U.S. companies will raise their prices to nearly match the tariffs while snatching some market share. The additional profits will flow to executives in higher bonuses and shareholders, at least until the higher prices hurt their steel- and aluminum-using customers. Then U.S. steel and aluminum makers will be hurt as well.

Mr. Trump seems not to understand that steel-using industries in the U.S. employ some 6.5 million Americans, while steel makers employ about 140,000. Transportation industries, including aircraft and autos, account for about 40% of domestic steel consumption, followed by packaging with 20% and building construction with 15%. All will have to pay higher prices, making them less competitive globally and in the U.S.

Instead of importing steel to make goods in America, many companies will simply import the finished product made from cheaper steel or aluminum abroad. Mr. Trump fancies himself the savior of the U.S. auto industry, but he might note that Ford Motor shares fell 3% Thursday and GM’s fell 4%. U.S. Steel gained 5.8%. Mr. Trump has handed a giant gift to foreign car makers, which will now have a cost advantage over Detroit. How do you think that will play in Michigan in 2020?

The National Retail Federation called the tariffs a “tax on American families,” who will pay higher prices for canned goods and even beer in aluminum cans. Another name for this is the Trump voter tax.

The economic damage will quickly compound because other countries can and will retaliate against U.S. exports. Not steel, but against farm goods, Harley-Davidson motorcycles, Cummins engines, John Deere tractors, and much more.

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Then there’s the diplomatic damage, made worse by Mr. Trump’s use of Section 232 to claim a threat to national security. In the process Mr. Trump is declaring a unilateral exception to U.S. trade agreements that other countries won’t forget and will surely emulate.

The national security threat from foreign steel is preposterous because China supplies only 2.2% of U.S. imports and Russia 8.7%. But the tariffs will whack that menace to world peace known as Canada, which supplies 16%. South Korea, which Mr. Trump needs for his strategy against North Korea, supplies 10%, Brazil 13% and Mexico 9%.

Oh, and Canada buys more American steel than any other country, accounting for 50% of U.S. steel exports. Mr. Trump is punishing our most important trading partner in the middle of a Nafta renegotiation that he claims will result in a much better deal. Instead he is taking a machete to America’s trade credibility. Why should Canada believe a word he says?

The Investors Business Daily followed suit stating in its editorial, entitled Sorry, Mr. President: Your Trade Protectionism Will Cost The U.S. Dearly:

Protectionism is a political feel-good policy that does nothing for the economy. It’s a big cost with very few tangible benefits. That’s why President Trump has made a big mistake in imposing big tariffs on steel and aluminum.

We understand, of course, that President Trump feels beholden to his constituencies in the U.S. who have been hurt by foreign competition, particularly in basic industries like steel and aluminum. But the 25% tariff on steel and 10% tariff on aluminum that Trump seeks to impose will lead to higher prices for all, the loss of thousands of jobs and a political-crony windfall for a handful of big companies.

“We’re going to be instituting tariffs next week,” Trump told a meeting of executives at the White House on Thursday. “People have no idea how badly our country has been treated by other countries.”

We have no doubt that what Trump says is true. But if so, it should be remedied through trade talks, not a trade war.

And make no mistake: The broad nature of Trump’s tariffs, hitting all exporters to the U.S., will invite some kind of retaliation from those who’ve been hit.

Already, EU Commission President Jean-Claude Juncker is threatening to respond in kind: “We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk,” he said. “The European Union will react firmly and commensurately to defend our interests.”

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Beijing is already looking at imposing trade penalties on U.S. sales of sorghum there, and may soon also target our sales of soy, too. Meanwhile, India, emboldened by the U.S. turn toward protectionism, might use Trump’s moves as a reason to protect its own wheat and rice sectors from U.S. imports.

So the steel and aluminum industry’s gains will be the loss of others.

Trump’s justification for tariffs is “national security.” But, as some have pointed out, the U.S. military uses only about 3% of domestic steel output, and much of our imported steel comes from allies like Canada. So the “threat” really isn’t much of one.

Of greater concern is what the higher prices for steel and aluminum — remember, a tariff is actually a tax — will do to our domestic economy.

As the R Street Institute think tank reminds us, “According to 2015 U.S. Census data, steel mills employ about 140,000 Americans, while steel-consuming industries, including automakers and other manufacturers who rely on imported steel, employ more than 5 million. It is estimated that nearly 200,000 jobs and $4 billion in wages were lost during the 18 months during 2002 and 2003 that President George W. Bush imposed tariffs on imported steel …” . . .

Protectionism is a bad road to travel. Let’s hope this move by President Trump is merely a negotiating ploy, and not a long-term policy. If it’s the latter, buckle up because we are going to be in for a long and bumpy ride.

President Trump has many times been called ignorant on trade, but the truth is that his trade views reflect the views of many Americans who believe that all (or at least most) imports are unfairly traded and who fail to understand the importance or profitability of U.S. exports.

For years, the U.S. Commerce Department has used a policy called zeroing, which allows it to create dumping rates when there simply were none. With China, Commerce creates dumping rates because it refuses to use actual prices or costs in China, instead using surrogate values from import statistics in 5 to 10 different countries to construct a cost. These faulty costing premises have now been used to justify a trade war with the World.

Foreign countries have many targets among U.S. exports against which they can strike back. This trade war will not be pretty and many Americans and American companies will be hurt. The rest of the world is likely to suffer as well.

There is still a small chance President Trump will back away from his tariff pronouncement. I sure do hope that happens.