{UAH} China unlikely to suffer the consequences from Trump tariffs

US president chooses the most drastic option available to him 

© Reuters

   

March 1, 2018 11:13 pm by Shawn Donnan in Washington

Donald Trump has said he will impose new tariffs on imports of steel and aluminium, fuelling fears that the US is about to start a trade war with China and other major trading partners. 

The move triggered a sharp sell-off in financial markets on Thursday, and prompted complaints from across the broader business community that US companies would be hit by higher prices. 

Here are five things you need to know. 

1. Mr Trump has chosen the most drastic option available to him. 

The president said he would sign an order announcing 25 per cent tariffs on steel imports and 10 per cent tariffs on aluminium imports.

The announcement followed investigations that he ordered last year into whether a surge in imports undermined the US's ability to source the steel and aluminium it needs to build military equipment such as tanks and warships, as well as the nation's broader economic security.

Last month, the commerce department recommended three separate options for each metal: a global tariff; tariffs targeted at China and other key countries mixed with quotas; and a universal quota.

Mr Trump opted for the global tariff option, potentially subjecting imports from all countries to the hefty levy. 

2. There are big questions about whether this makes sense economically. 

The US steel and aluminium industries argue that they have faced an existential assault for more than a decade from China, which has become the world's largest producer of both metals and has flooded global markets with cheap products. The tariffs are intended to restrict imports and allow the US steel and aluminium industries to increase production and use idle capacity, as well as rehire workers. 

But history shows that imposing tariffs to protect one industry often results in pain for another. According to industry groups, some 6.5m people are employed in the US in businesses that use steel and aluminium.

After President George W Bush imposed tariffs on steel imports in 2002, one study found the move had cost the US about 200,000 jobs. 

As a result, many Republicans see tariffs as a mistake, and worry that such a broad move will undermine other efforts such as tax reform intended to boost economic growth. 

"The president is right to target unfair trade, but blanket tariffs that sweep up fairly traded steel and aluminium can backfire and harm our businesses and workers," said Kevin Brady, the Republican Congressman who chairs the House Ways and Means committee.

3. The move is aimed at China, but China is unlikely to suffer the consequences. 

The US aluminium and steel industries have long been clamouring for protection from what they claim is unfair competition from China.

But following a series of product- and country-specific tariffs introduced in recent years, China now accounts for very little of the steel or aluminium imported into the US.

Instead, the leading source for the US of both metals is Canada. Other major Nato members like Germany also are major exporters of steel to the US. 

Many trade experts expect there will be a process for countries and companies to apply to be exempted from the tariffs. For example, Canada has long been considered part of the US national security industrial base, meaning lawyers say it has a strong case to be exempted. Mexico could also apply for an exception given its membership in the North American Free Trade Agreement, although that pact is now being renegotiated. 

But such a process is also likely to lead to furious lobbying of the president by companies who will have to seek to curry favour with the administration, said Phil Levy, a former trade adviser to President George W Bush. 

"It is just about the polar opposite of draining the swamp," Mr Levy said.

4. China and the EU are likely to retaliate, as are other major US trading partners. 

EU officials have made clear that they are prepared to retaliate against any US move to impose tariffs and challenge them in the World Trade Organization. 

EU member states have already begun discussing possible targets for retaliation. In the EU firing line are likely to be politically-sensitive products like Kentucky Bourbon — from top Republican senator Mitch McConnell's home state — and cheese from Wisconsin, the home of House Speaker Paul Ryan. 

Wendy Cutler, a former senior US trade official who heads the Asia Society Policy Institute, said China would also likely respond with "quick and proportional" trade measures.

5. By invoking national security, the president is ending a longstanding ceasefire in the global trading system. 

Ever since it was established following the second world war, the General Agreement on Tariffs and Trade has included a loophole which allows countries to invoke "national security" to impose tariffs and other trade barriers in the event of war or other national threats. But the US and other countries have studiously stayed away from using that loophole for decades, for fear that doing so would lead others to do the same. 

By invoking national security in the steel and aluminium tariffs, Mr Trump is throwing out that decades-old gentleman's agreement.

Part of the problem is that the president has made his disdain for the WTO clear. If the US is challenged at the WTO and a panel finds that Washington wrongly invoked national security, Mr Trump — if he is still president — could decide to ignore the finding, or even pull the US out of the body altogether.

Others worry that it could also have the long-feared "domino effect", with countries like China using national security as an excuse for their own trade measures. 

"This will either close the door on being able to self-define 'national security' or open the door on being able to block imports simply by waving the 'national security' flag," said John Veroneau, who served as a senior trade official in the administration of George W Bush and is now at law firm Covington & Burling. 

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