Steeling for a Fight

“Trade wars are good, and easy to win.” So tweeted President Donald Trump on March 2. His flippant remark may soon be put to the test, as the European Union gears up to retaliate against the punitive tariffs that Trump threatened to slap on U.S. steel and aluminum imports. An EU response would prompt a tit-for-tat blow against U.S. imports of European cars, Trump added on Twitter the following day. China and Canada have also threatened to hit back against Trump’s protectionism. Trade war seems to beckon.

Trump let slip his intention to slap 25 percent import duties on steel and 10 percent tariffs on aluminum for an “unlimited period” at a question-and-answer session with industry representatives on March 1. Of course, it may not come to that. Trump often makes big threats that amount to nothing or are subsequently watered down. He may be talking tough to send a signal to his electoral base, to whom he promised decisive action to bring back American jobs. He was doubtless trying to divert attention from Robert Mueller’s investigation into Russia’s involvement in the 2016 election, as well as from the crises that threaten to engulf his son-in-law and plenipotentiary, Jared Kushner. Trump’s eventual trade measures may end up being less extreme; for instance, his planned announcement Thursday may exclude some countries and target only some steel and aluminum products.

Even if the president softens his line, protectionists now seem to be driving U.S. economic policy. The resignation of Gary Cohn on March 6, Trump’s internationalist chief economic advisor, who was vehemently opposed to the tariffs, suggests that the economic nationalists in the White House have won the debate. And if the threatened blanket tariffs are indeed imposed, on the spurious pretext that imports of steel from NATO allies such as Canada and Germany threaten America’s “national security,” the consequences could be severe. Reality TV politics could give way to real trade conflict.

The immediate economic impact of the tariffs would be significant. They would affect $46 billion of U.S. imports, some 2 percent of total U.S. goods imports. Perversely, the United States itself would be hit hardest. While only about 140,000 Americans work in the steel industry, some 17 million are employed in steel-using industries. More expensive steel would push up those firms’ costs, making them less competitive globally and increasing prices for American consumers. President George W. Bush imposed less extreme steel tariffs in 2002; they ended up costing 200,000 jobs, a study found. (Bush’s tariffs affected only some steel products and exempted Canada, Mexico, and others. They were lifted a year later after the EU and other countries challenged their legality at the World Trade Organization.)

Trump’s tariffs ostensibly aim to target China, which the Trump administration views as a strategic competitor and military threat. Yet they would leave Beijing largely unscathed; China exports only 0.2 percent of its total steel output to the United States. Moreover, China ranks eleventh among sources of U.S. steel imports, accounting for a 2 percent share of the total. While China is the fourth-biggest aluminum exporter to the United States, the $3.1 billion of aluminum it exported accounts for a tiny fraction of the $462.6 billion worth of total goods it exported to the United States in 2016. For China, Trump’s tariffs would be scarcely a scratch.

But they would hurt many other countries. If you break down the value of U.S. steel imports in 2017 by country, you get a roll-call of American allies: EU (21.4 percent), Canada (17.6 percent), South Korea (9.6 percent), and Mexico (8.6 percent). Canada in particular is closely integrated with the U.S. defense industry. No wonder the Pentagon is aghast.

The economic costs would multiply if other countries retaliated. The European Commission is already preparing to hit back. The EU exported $6.5 billion of steel and $1.4 billion of aluminum to the United States in 2017, but it is initially planning to impose sanctions against only $3.5 billion of U.S. imports.

To that end, the Commission has presented EU governments with a list of more than 100 products that could be targeted, chosen for their political sensitivity. In addition to steel, aluminum, and agricultural produce from farm states that voted for Trump, these include Levi’s jeans, bourbon whiskey (principally from Kentucky, the home state of Senate Majority Leader Mitch McConnell), and Harley-Davidson motorcycles and Wisconsin cheese (from the home state of House Speaker Paul Ryan.) The pressure seems to be working: “We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,” Ryan’s spokeswoman said.

For sure, retaliation would be painful for EU consumers and businesses that rely on U.S. products. Like real wars, trade wars cause casualties on both sides. But EU policymakers feel compelled to stand up to Trump’s bullying. For once, European Commission President Jean-Claude Juncker got it right when he said: “This is basically a stupid process, the fact that we must to do this, but we have to.”

Trump seems to think that the size of the U.S. market and its trade deficit allow it to play hardball — in 2017, the United States had a $151 billion goods trade deficit with the EU — but the EU and other governments feel that they have more to lose from giving in to Trump’s bullying. While Trump seems to thrive on creating chaos, this is unlikely to be productive in trade diplomacy.

The biggest danger is that if nobody is willing to back down, this tit-for-tat process could quickly escalate. Trump’s threatened retaliation against European cars would take the conflict to another level. The U.S. imported more than $43 billion of cars from the EU in 2016 — a tenth of its total imports from the EU — $22.2 billion of which came from Germany alone. How might the EU respond to that?

Ultimately, a trade war would cost jobs, push up inflation (and potentially interest rates), and harm economic growth. It would deal a further blow to political relations between the United States and its allies, which have already been undermined by Trump’s “America First” rhetoric, disdain for liberal values, and transactional approach to foreign policy. And it would shatter the informal alliance among the United States, European Union, and Japan to tackle what they see as unfair Chinese trade practices while allowing China to pose as a defender of the international trading system.

A trade war between the U.S. and the EU would be particularly thorny for a British government consumed by Brexit. It would underline the value of being part of a big trading bloc capable of facing up to Trump’s bullying, and thus the cost to the United Kingdom of exiting the EU in March 2019. It would make an ambitious post-Brexit trade deal with the United States even less likely. And it would make the United Kingdom acutely vulnerable to U.S. pressure as it seeks to renegotiate bilaterally all sorts of treaties that the EU previously negotiated on its behalf with the U.S. government. Predictably, Washington is already playing hardball in renegotiating the Open Skies agreement that governs transatlantic air travel.

Trump is also seeking to use the steel tariffs as leverage in the ongoing renegotiation of the North American Free Trade Agreement with Canada and Mexico. But the U.S. is demanding terms that its partners deem unacceptable, including a requirement that 50 percent of the content of cars made in NAFTA come from the United States.

Steel protectionism may also be contagious. There is a glut of steel globally, and the EU is preparing safeguard measures in the event of a surge of steel and aluminum imports from other countries as a result of the Trump tariffs.

The EU and others are also planning to challenge Trump’s tariffs at the WTO. While WTO rules allow countries to restrict trade on national security grounds, this exception is designed for exceptional times such as war. The EU has a strong case since Trump himself has repeatedly justified his threatened tariffs on economic rather than national security grounds.

But this is a lose-lose scenario for the WTO. It may be loath to be seen to trample on supposed U.S. national security concerns, but if it ruled in the Washington’s favor, this would provide carte blanche for other countries to spuriously curb imports on national security grounds. If it ruled against Trump, his administration would probably ignore the ruling, and might even pull out of the WTO, as it has previously threatened to do. The former would leave the U.S. tariffs in place, with legal sanction for the retaliatory tariffs by the EU and other trading partners deemed to have suffered harm. The latter would blow a huge hole in the institution that provides peaceful arbitration for international trade disputes.

Trade wars are never good. Nor do they have winners, let alone easy ones. And they certainly won’t make America great again.