The imposition of tariffs by the USA on steel and aluminium today is most unfortunate, but it is not yet, nationally speaking, a disaster.

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1 June 2018

L. Alan Winters CB is Professor of Economics and Director of the Observatory.

President Trump threatened them two months ago and invited various countries to avoid them by agreeing ‘voluntarily’ to curtail their exports to the USA. Korea, Argentina, Australia and Brazil agreed to do so but, to their credit, Canada, the European Union and Mexico did not, and so face 25 percent tariffs from today.

The tariffs are arguably illegal because although the World Trade Organisation rules permit members to impose trade restrictions in the name of national security, very little use has been made of those provisions in the past and the USA has not made a plausible case of immediate national security threats. Rather, US government statements refer to the travails of the US steel sector – that is, the tariffs are simply protection for an economic sector not of a national economy.

It’s not yet a disaster because steel has gone through several cycles of protection and liberalisation in the past, and the world trading system has survived. The EU response of limited retaliation is the correct one, and provided that it stops there – we do not have a counter-retaliation from the USA – it is probably not an existential threat to the world trading system, which has contributed so much to global prosperity over the last 70 years.

Three things are far more alarming:

• First, the USA is undermining the WTO by refusing to agree to the appointment of judges to the Appellate Body (essentially the WTO’s Supreme Court). Before long, the WTO will be unable to hear appeals on disputes and the system will grind to a halt. There will be no enforcement mechanism for the ‘rules-based system’.
• Second, the USA’s initiation of an inquiry into the national security case for imposing tariffs on imports of cars is much worse than the steel case. The sector is much larger (over $1trillion of world trade in cars and car parts) and the national security case for excluding civilian passenger cars is just risible. The investigation is bad enough; if it resulted in tariffs, there would be massive and widespread economic costs and vigorous retaliation.
• Third, the USA has made quite unreasonable demands of China and threatened high tariffs on up to $150billion of Chinese exports to the USA. Followed through, this would, again, be massively disruptive.

The world trading system has been fundamental to the post-war success of the world economy which has seen large increases in incomes and (for the first time in history) an absolute fall in world poverty. It is now under threat. For sure US workers are facing considerable disruption and hardship, but the main cause is not international trade and the solutions lie in domestic policy, not in trade restrictions.

 

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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