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Trump’s plan to make American steel great again could set off global trade wars

His use of a trade loophole wold hurt US allies more than China.

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President Trump is on the brink of striking at China’s behemoth steel industry through an obscure trade loophole in US law. But if he actually pulls it off, it will be US allies, not China, that will feel the brunt of it — and they could end up retaliating with harsh measures of their own, sending us down a path to global trade wars.

According to reports, we are just days away from finding out what the White House is planning to do as it concludes its investigation into whether steel imports into the US constitute a threat to national security, which was announced in late April.

The Trump administration is using a little-known provision in the Trade Expansion Act of 1962 to argue that if the US doesn’t have reliable access to materials required for national security, it has license to set up big trade barriers in order to boost domestic production of them. The White House is suggesting this could be the case for steel, a vital metal for defense technology.

Right now, the two main options the administration is considering are across-the-board tariffs that would tax all steel coming into the US at prohibitively high rates, and quotas that would allow at least some steel to be imported from countries each year until they cross a certain threshold, after which tariffs are induced.

The Trump administration argues that this would be a boon to American steelworkers and a serious blow to China. After all, the US is the world’s largest importer of steel, and China is the world’s largest producer of it. Creating obstacles for steel imports should give Americans steel jobs and bring China’s steel production — which violates global trade rules in the way it is made and sold, and has flooded global markets — to heel.

But in fact, the prospect of punitive American tariffs is worrying a whole bunch of countries that aren’t China — including some of America’s closest allies. To get a sense of why, take a look at the chart below, which shows where the US gets most of its steel from.

International Trade Administration

If you’re thinking you’ve missed the word “China” on that chart, you haven’t: China doesn’t even make it into the top 10 sources of steel for the US today.

That’s because the US already subjects Chinese steel to a variety of penalties for violating trade rules, and those have slowed Chinese steel imports to a trickle. Today, the US gets huge amounts of its steel from countries it considers close allies and trading partners, like Canada, South Korea, and Mexico. And those are the main countries that would be hit by tariffs or quotas.

So that’s why we’re seeing some rather striking signs of pushback and anxiety from key economic partners. The Financial Times reported last week that military officials from Germany and the Netherlands have made the case against Trump’s potential steel tariffs to his defense secretary, James Mattis. Top Canadian officials have also warned the White House against this kind of maneuver. And European Union officials are considering retaliatory tariffs against American agriculture.

Generating steel jobs through punitive tariffs is already a questionable policy (more on that in a minute), but what’s clear is that if Trump pulls the trigger on this, it could generate a huge wave of economic instability across the world.

How Trump’s big move on steel would actually work

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The law the Trump administration is using to make this all happen — a provision known as Section 232 in the Trade Expansion Act of 1962 — basically says that the US can block the import of materials critical for national security in order to ensure that the country has reliable supplies in the event of a war.

Now, the law doesn’t necessarily mean that the country has to have these supplies generated domestically. Edward Alden, a senior fellow at the Council on Foreign Relations, told me that “normally when these investigations are done, the government doesn’t just look at self-reliance, but also reliable, trusted allies.”

But this isn’t really about national security — that just happens to be the legal argument the administration is using to establish that it has the legal authority to do this. If this were just about national security — that is, making sure we have reliable access to steel in the event of a major war — the fact that we get much of our steel from close allies should satisfy that requirement.

In reality, Trump is trying to boost the domestic US steel industry. Which means that even the US allies’ ability to produce steel is actually part of the problem, in Trump’s view.

If he decides to go with tariffs or quotas, he could technically make exceptions to them. He could rule that Canada and Mexico — the US’s trading partners under the NAFTA agreement — are exempt from it. But if there are to be exceptions, or sophisticated quota systems to be designed, it will take time, and right now the Trump administration is moving with haste. And there are still several other US allies on that chart up there who would likely be harmed.

Chad Bown, a senior fellow at the pro-free trade Peterson Institute for International Economics, told me that typically these kinds of investigations take many months or even a year and involve extensive public hearings with all stakeholders, including domestic industry players and exporting nations. But right now, reports suggest a decision will be announced in the coming days — and the administration only started the investigation in late April. That’s just two months. What’s more, the discussions have taken place almost entirely behind closed doors.

That level of speed and secrecy increases the likelihood of a botched rollout. And that’s to say nothing of the many costs the action could have — specifically, trade wars.

Trade wars could be on the horizon

It’s very difficult to predict what Trump’s move on steel under Section 232 would look like since there’s not a great deal of precedent. “There’s been maybe two or three times in the last 40 years we’ve seen trade barriers being used under this law,” Bown told me.

The World Trade Organization technically allows countries exceptions to free trade norms on the basis of ensuring national security. But it’s an exception that’s rarely invoked. And, crucially, it would be clear to everyone in the global community that the Trump administration wasn’t doing this for actual security reasons, but rather was exploiting a loophole to make a move that’s purely meant to advance US economic interests.

The invocation of national security will look like a bad-faith maneuver to the world, an excuse to take self-interested action on behalf of domestic industry. With that kind of precedent, other countries could end up taking similar kinds of actions to justify their own protectionism. All of a sudden, the national security exception could become a pathway to dodging tariff norms, and ultimately become the source of all kinds of conflict and litigation at the WTO.

Some European officials have already been talking about potential retaliatory tariffs against the US on other sectors of the economy. “There’s a lot of other countries that would be willing to invoke food security [to justify their own tariffs],” CFR’s Alden explains. US agricultural exports could take a serious beating if many countries decided to take this course of action — and that would in turn cause job losses in that industry.

That all being said, there is one major case to be made for Trump’s threat to slap big tariffs on steel. As Todd Tucker, a trade expert at the left-leaning Roosevelt Institute, argues, the move could be productive if it was actually a bargaining chip for something bigger: negotiations with the global community over how to deal with China’s cheating on steel production.

Here’s how that could work: Trump threatens to slap punitive tariffs on all steel imports, but makes it clear that they’re temporary measures that could be changed if other countries around the world agree to join a summit with the US to discuss what to do about China. They could then, perhaps, collectively decide to crack down on China with coordinated tariffs, something the WTO has proven incapable of providing a forum for. That would in turn rein in China, help bring the price of steel back up worldwide, and make everyone’s domestic steel production more competitive.

There’s precedent for using tariffs as an aggressive way to motivate countries to take collective action. In 1971, Nixon used aggressive tariffs on incoming goods in order to force other countries to come to the negotiating table with the US on how to deal with the overvalued dollar. Reagan also used threats of tariffs to bring countries together to collaborate on currency issues with other countries for the 1985 Plaza Accord.

But in order to use the threat of steel tariffs as an opening gambit to broader negotiations with the global community, the Trump administration would need a great deal more of a resource it’s lacking: credibility. Trump’s constant reversals, ambiguity, mixed signals, and outright hostility to following through on US commitments on everything from trade deals to military alliances have destroyed trust in the US’s ability to actually fulfill its pledges. So even just as a negotiation tactic, threats on steel imports are risky and quite likely to alienate friends of the US.

Trump’s move might not generate jobs — even in the steel industry

It’s also worth noting that this is by no means a slam dunk in terms of job creation, even if other countries don’t retaliate. Tucker said that if steel tariffs were instituted across the board, there would be “no net change in jobs for the economy as a whole,” given that the country is approaching full employment and the enhanced profitability of steel production would probably cause a shift away from other industries.

Bown, of the Peterson Institute, is also skeptical of a net gain in jobs in the US for two main reasons. One is that bringing back jobs in industries that involve sophisticated machinery can be tricky.

“More steel production doesn’t necessarily translate into jobs, as these facilities are increasingly automated with robots and technology doing more cheaply what ‘people’ used to do,” Bown says. “So it is not clear to me that this even ends up saving a lot of jobs within the US steel industry over the long term.”

The other issue is that lots of industries like auto, construction, and energy rely on cheap steel, and these industries would have more trouble making money with the spike in the price of steel that would accompany tariffs. For every US steelworker, there are roughly 60 in industries that use steel. What will happen to jobs and wages in those industries with tighter profit margins?

The bottom line, then, is that if Trump actually ends up pulling the trigger on these tariffs, the chances are high that it could end up hurting the US a great deal more than it helps.

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