Consequences of announced US import tariffs
Donald Trump has caused many controversies since he was inaugurated as the 45th president of the United States. As examples of this, one might think of his statements regarding women, NFL players taking the knee during the national anthem in a protest against racial injustice, or the wall on the border with Mexico.
When it comes to a time where our country can't make aluminium and steel ... you almost don't have much of a country.
Recently, Trump managed to grab the media attention again. However, this time his actions could have severe consequences for other countries as well. Namely, he announced an import tariff of 24% on steel and of 10% on aluminium. Even though the specifics on how the measure would be implemented were unclear, it immediately caused a shock through the world. He argues that the policy is a matter of national security as the US is unable to fulfil its own demand. He said: “When it comes to a time where our country can't make aluminium and steel ... you almost don't have much of a country." This follows a dispute with Canada and Mexico regarding a revision of the NAFTA agreements. After months of discussion, no meaningful progress has been made. Trump also withdrew the US from the Trans-Pacific Partnership on his first day as president.
However, the tariff is going to result in higher costs for firms using steel or aluminium as inputs for production.
Stock markets all over the world were hit by the announcement. In Asia, the markets hit a multi-week low. In addition, European steel and aluminium manufacturers and exporters took a big hit. Even the US Dow Jones dipped 1.7 percent. The purpose of this measure is that the US market is supposed to be protected. However, the tariff is going to result in higher costs for firms using steel or aluminium as inputs for production. Furthermore, many experts expect other countries to retaliate, which would also hurt US firms. Senator Pat Roberts said that agriculture is very likely the primary target for the retaliations. Even though only 1.6% of the US population is employed in this sector, it is also a key sector to have independence in. The first sign of retaliation is coming from China, who is threatening to curb imports on US soybeans.
Many fear these are the first steps of a trade war, where many countries raise various import tariffs as reaction to each other. According to research by The Economist, consumers are likely to be the biggest losers if a trade war was to occur. The result might be an overall increase in price inflation, which is 0.9 percentage point higher in 2017, and 1.5 percentage point higher in 2018. This would result in significantly lower private consumption growth in the US. It is depicted in the graph below.
On the other hand, the effect on China would be far less as most of the US goods imported by China are luxury items. These can be easily substituted or not consumed at all. Furthermore, China can easily obtain the goods it imports from the US from other countries. For example, the soybeans can be imported from Latin America. The estimated effect on the growth of private consumption is shown in the graph below.
Even within the Republican Party, there is opposition to this plan. They argue that retaliation is very likely, and that the prices of steel and aluminium would increase. This will hurt other US industries like car manufacturing. Mike Lee, the Republican senator of Utah, noted that this would result in the loss of jobs in these industries. The net effect on jobs will be negative since many US industries are steel dependent. Furthermore, only three percent of all steel produced for the US market is needed for national security.
Trump believes China is creating excess supply on the world market to drive down global prices.
Both arguments Trump used for the import tariffs on steel and aluminium, namely protecting the US market and national security, seem undermined. Trump responded that the US is going to increase its defence spending in the coming years, which will increase the three percent of steel usage for matters of national security. Trump’s focus is on the steel and aluminium originating from China as Trump believes China is creating excess supply on the world market to drive down global prices.
Trump faced more critics within his party. Senator Lamar Alexander noted that former president George W. Bush imposed steel tariffs in 2002. As a result, many car manufacturers moved their facilities elsewhere, taking the US jobs with them. It is likely that firms will do this again, especially since firms are becoming ever more global.
However, more jobs are likely to be lost than won because of the hit to steel-using industries.
Since Trump became president, he has taken several protective trade measures. His most recent move has gotten much attention. It caused a large drop in share prices in many market all over the world, even in the US. The announcement got a lot of critique also from people in the Republican Party. The measures are supposed to safeguard national security and protect US jobs. However, more jobs are likely to be lost than won because of the hit to steel-using industries. Only three percent of the steel used in the US is critical for national security. Furthermore, a trade war will have very adverse consequences for US consumers. Given the nature of the products traded with China, the US consumers would also be hurt more than the Chinese consumers would. Given Trump’s perseverance this is probably not the end to this story.
