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Why Trump takes a hard line on steel and aluminum

A global glut of steel and aluminum puts pressure on a domestic industry that the president says is vital for national security. He says tariffs will push back against unfair trade practices, but critics worry about 'trade war' risk.

Reuters
Laborers work at a steel plant of Shandong Iron & Steel Group in Jinan, Shandong province, China, July 7, 2017.

President Trump signed actions Thursday to impose significant tariffs on imported steel and aluminum, in a move he says will help protect American national security and jobs in those industries.

It's arguably his biggest and most controversial trade moves yet, stirring worries that retaliatory moves by other nations could damage global economic growth and lead down a path toward greater protectionism or even a trade war. But in the ceremony Thursday, the president framed the effort as a lever to push other nations toward fairer trade practices. 

"We just want fairness," he said. "We want everything to be reciprocal." He chose to give Canada and Mexico an indefinite exemption from the tariffs, creating a grace period that may nudge them to reach a deal on a separate trade issue: Mr. Trump's desire to renegotiate the North American Free Trade Agreement.

Here's a look at some key issues at stake, including the threat of a global trade war.

Q: What is this dispute about?

Overcapacity has become a big problem for the global steel industry, a challenge created largely by surging supply from China, which now accounts for half of world steel production. The United States, saying that Chinese subsidies and dumping violate global rules, already imposes sanctions that crimp imports from China. But the US industry charges that China has cheated by exporting unfinished steel to other nations, such as Vietnam and South Korea, which process it and then export it to the US. Competition from cheap aluminum imports has slashed the number of US smelters from 23 to five in the past quarter century. In a letter to Mr. Trump last fall, retired military officers said only one US manufacturer makes the high-end steel that’s key for electrical transformers and one US smelter produces the high-purity aluminum necessary for fighter jets.

Q: The Trump administration’s proposed tariffs have stirred a lot of public worry. Why?

On March 1 Trump said he would impose tariffs on imports – 25 percent on steel and 10 percent on aluminum. Analysts see the effort as a game of chicken, with the president gambling that he can force other nations to reduce steel and aluminum production to reduce the glut. Then the tariffs might no longer be needed. But another possibility is that other nations retaliate with their own trade barriers, hurting US exports and putting upward pressure on consumer prices worldwide.

Q: Are we headed for a trade war?

It’s a long path to an all-out trade war. Experts think retaliation by nations hit by tariffs will be proportional: Penalties against US exporters will equal what those nations lose from the US tariffs. “We think this will mean this bout of protectionism is manageable and won’t have a big negative effect on global GDP growth,” Michael Jakeman, global analyst for the Economist Intelligence Unit, writes in an email. In his formal announcement of the tariffs May 8, Trump offered wiggle room on the metals tariffs, implying they might be modified or removed for some trading partners, pending further negotiations.

Q: So who are the winners in trade sanctions?

The companies that get protection are the big winners because the tariffs on foreign imports will make imports more expensive, allowing US companies to raise prices. Workers in those industries also tend to benefit. When Trump slapped duties on imported washing machines in January, South Korean appliancemaker LG sped up its timetable to open its new US factory in Tennessee, which is slated to employ 600 workers. Samsung, which had been selling its foreign-made washing machines in the US, has already hired more than 600 workers to make the washers domestically at its new South Carolina plant.

Q: Who are the losers?

Consumers are the immediate victims. Imports cost more because of the tariffs. Indirectly, everyone gets pinched as metal-using companies such as carmakers pay higher prices for the protected goods. Those manufacturers either bear the added cost, hurting their profitability, or pass on those costs to consumers. If other countries retaliate with sanctions, then the effect spreads. Workers in affected companies could see fewer pay hikes and perhaps even layoffs. US farmers, as major exporters, are quite vulnerable to retaliatory trade sanctions.

Q: Are trade sanctions ever justified?

Yes. One big argument is that national defense shouldn’t be sacrificed on the altar of free trade. And when countries cheat and subsidize their exporting companies, targeted and proportional retaliation can push them to the negotiating table. Typically, such cases go to the World Trade Organization, which determines who is cheating and whether the retaliation is justified.

Q: Where could this dispute head?

Trump’s trade advisers say a tough new tack is necessary because other efforts, including a multilateral forum launched under President Barack Obama, aren’t delivering results fast enough.

Many trade experts, however, say slapping tariffs on some of America’s longtime trading partners makes it harder to build a coalition that could be truly effective in confronting China. Another challenge: Trump is invoking national security as the justification for his moves. While highly targeted protection may be justified in some circumstances, many analysts say, it’s a questionable claim when so broadly applied, and it invites other nations to do the same.

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