Trump’s tariff on trade

From a crisis in 2016 resulting in a near death experience for the UK steel industry, a gentle recovery is now visible in today’s global economy. But, as President Donald Trump introduces tariffs on steel and aluminium imports to the US, fulfilling his promise to American steel workers, does this recovery now hang in the balance? A 25% tariff for steel, and 10% for aluminium, is a cause for considerable and real concern for UK industries. A closer look at the reasons behind these changes and potential implications is required.

Why have these tariffs been introduced?

During his election campaign, President Trump described the steel industry as the backbone of the US economy. In his desire to capture the blue-collar vote, emblematically in the US Midwest and Great Lakes (also known as the Rust Belt), and establish his credentials as the champion of ‘America First’, he committed to turning back the tide of deindustrialisation and to return the US steel industry to its former significance. He would find it very difficult, even if he wished, to row back from such promises.

A central reason given to justify the introduction of the tariffs stem from the belief that imported steel is a threat to US national security – but what have the White House based these claims on? After all, only 3% of steel used in the US is for their defence industry. Many US companies require specialist steels not currently produced in the US – as a result of these tariffs, the cost of steel for these companies will rise considerably. If the intention is to prompt US steel producers to fill the gap for speciality steels, a much longer-term game is in play.

Another driver behind these trade tariffs is the belief that they will be a deterrent against Chinese steel dumping. But how much of an impact does China’s steel production actually have on the US? Although annually China produces 800 million tonnes (Mt) of steel (compared to the 82 Mt of the US), Chinese steel exports to the US constitute only approximately 1% of US steel imports, worth $800,000. The US is 26th on the list of countries that China exports steel to and 10th in terms of who the US imports steel from.

The top five countries sending steel to the US (% = percentage of overall global US steel imports, annually):

• Canada (17%)
• Brazil (14%)
• South Korea (10%)
• Mexico (9%)
• Russia (8%)

The belief that overproduction of steel by China has led to dumping on the world stage is generally agreed. It is not though, in itself, a significant problem for the US. In reality, it is the total burden of US steel imports from across the world that is likely the greatest focus for the Trump Administration.

The global response to Trump’s tariffs

The response to these tariffs by the main exporters of steel to the US has been consistent and highly critical. At its 2018 Annual Conference, the European Steel Association (Eurofer) described the policy as, ‘absurd’ and ‘protectionist’. Mexico considers the imposition of tariffs based on the steel industry being a threat to national security as illegitimate under General Agreement on Tariffs and Trade (GATT) articles (XXI) and will be filing a complaint to the World Trade Organisation (WTO). The EU, Mexico and Canada have all indicated that across a wide range of manufactured and agricultural goods, counter tariffs will be imposed.

Impact on the UK steel industry

The UK exports around 7% of its steel to the US each year, worth about £360million. Although steel exports contribute 0.1% of the UK economy, the industry directly sustains 32,000 employees and the activities of 600 firms. When taking into consideration the wider network of people and companies involved in the steel supply chain, the number of those employed in the UK rises to around 100,000. Beyond steel’s impact on national economy, the generally higher skill-base and wage rates of steel workers are significant to the UK labour market.

Furthermore, the concentration of steel jobs in specific regions and communities of the UK means that any sudden changes or restrictions to the industry will lead to social and economic disruption, in what is an already unbalanced national economy. In short, the decision by the US to impose tariffs will have a harmful impact not only to the UK steel industry, its workers and their communities but to the national economy.

The US has imposed steel tariffs before

The recent announcement on tariffs has been a repeat in history for many in the steel industry. In 2002, under the presidency of George W Bush, a tariff strategy on steel was introduced. These tariffs were endured for 21 months, ending (to a significant extent) as a result of significant pressure from the EU. By the end of this period, due to the need for specific types of steel, the US government had been compelled to exempt 25% of imports from the tariff policy. More significantly, research within the US estimated that the 2002 round of tariffs on steel impacted on the wider US economy resulting in the loss of 200,000 jobs. Similar calculations on the potential impact of President Trump’s policy is that although the US steel industry might gain around 33,000 jobs, overall job losses to the economy will approach 140,000. Although the Trump Administration contests this analysis, the experience of the Bush experiment is clear to see.

What does the future hold?

In economic terms, although Wilbur Ross, the US Commerce Secretary, appears confident about the impact of the tariff policy on US consumer prices, this will not be significant, the overall economic impact of the policy is likely to be a negative one for the US economy. Besides national security it is economic benefits that are cited as the main driver for specifically targeting steel (and Aluminium). In purely economic terms however, it seems more than likely that the general $337billion trade deficit of the US with China is the real target for the US trade policy. Underlying both national security and economic considerations though, it seems clear that the origin of Trump’s steel strategy is essentially domestic and political.

Beyond the ideological views of the White House, there will be no winners from Trumps tariff policy, only a series of losers of different degrees. If the World Trade Organisation (WTO) is to retain any relevance for the future regulation of international trade, a negotiated settlement to a looming trade war is needed, sooner rather than later. As for the UK government, a Trump industrial strategy that supports steel workers and their communities, must be a good thing, the worldwide, imposition of tariffs is not, however, the way that this will ultimately be achieved.