Jeremy Warner in the Sunday Telegraph March 4th
Until last week Donald Trump’s bark on trade protectionism, as on many other things, had proved a good deal worse than his bite. On the campaign trail, he promised a protectionist blitz reminiscent of the notorious Smoot-Hawley tariff act, which helped plunge the world into the political and economic instability of the Thirties. But in practice, wiser counsel seemed to prevail. The promise to scrap the North American Free Trade Agreement (Nafta) has transmogrified into an attempt merely to update and tweak it.
We relaxed too soon, it now appears. The significance of last week’s announcement of tariffs on steel and aluminium was less the tariffs themselves, which in the scale of things are unlikely to make a huge difference. By making things more expensive they could even prove a faintly depressing influence on the US economy.
Rather, it was the way they were justified, which according to Linklaters’ senior counsel on trade, the Cambridge academic Lorand Bartels, breaks new and disturbing ground. Normally, some genuine or spurious economic reason is given as justification for import tariffs, anti-dumping being the most common.
The claims can then be tested through the World Trade Organisation, and thereby mandated by the international, rules-based system.
But Trump has played the far less usual “national security” card. Not to beat about the bush, he is basically saying that the US needs its own steel and aluminium industries for the purpose of military defence. Those of us who have lamented the virtual destruction of the UK steel industry know how he feels. The economy somehow feels less than complete without the capacity to press steel.
But by using a justification which is basically not recognised by the WTO, Trump is playing outside the rules. Legal challenge through the WTO may be pointless anyway, as the organisation’s judicial function is being rendered progressively dysfunctional by Trump’s refusal to sanction key appointments.
Protectionism has been on the rise ever since the financial crisis, but hitherto international adherence to the WTO system has at least managed to keep the lid on it. Trump is essentially saying that the rules-based system the WTO champions does not work for America. Others will be loathe to retaliate in the same manner, as if they too were to break with the system, it really would be the end of the WTO.
But if Trump continues to push his protectionist agenda, the dam will eventually burst. There is trouble ahead for sure; just how big depends on what Trump does next.
Ambrose Evans Pritchard looks at it in more detail, same paper:
The world is on the brink of the most dramatic trade confrontation of modern times after President Donald Trump openly threatened “trade wars” as a tool of US policy, prompting warnings of full retaliation by major powers across the world.
Stock markets plunged in Asia and Europe for a second day as international investors digested the ominous implications of sweeping US tariffs of 25pc on steel and 10pc on aluminium. The measures are viewed universally as an impetuous and unprovoked assault on the trade system, evoking memories of the Smoot-Hawley tariffs of 1930.
The International Monetary Fund warned on Friday that the tariffs on would likely cause economic damage to the United States and its trading partners.
"The import restrictions announced by the US President are likely to cause damage not only outside the US, but also to the US economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel," the IMF said in a terse statement.
The shocking twist is that President Trump seemed to relish the chance for a dangerous showdown, tweeting on Friday that “trade wars are good, and easy to win”.
Countries that “get cute” and exploit the US market by running chronic trade surpluses may see their access cut off altogether. A view has taken hold in the White House that deficit countries suffer less than surplus states in a trade rupture, which neglects the risk that events can spiral out of control.
Japan’s Nikkei index dropped a further 2.5pc and Germany’s DAX was off 2.3pc on Friday as the correction threatens to become a full-blown rout. Wall Street opened sharply lower, with DOW off 300 points, led by falls of General Motors, Ford, and other big consumers of steel.
"For someone so obsessed with stock market performance, he's taking a big gamble with these tariffs," said Craig Erlam from Oanda.
The White House has exploited a ‘golden loophole’ dating back to the Cold War in the 1970s allowing the US to invoke national security to impose barriers, arguing that surging inflows of foreign steel leave the US arms industry and defence forces at the mercy of hostile suppliers. Use of this clause effectively blocks any future remedies at the World Trade Organisation by injured countries.
Bernd Lange, head of the European Parliament’s trade committee, called it a “declaration of war” and accused the Trump Administration of reverting the mercantilist doctrines of the early 19th Century.
French finance minister Bruno Le Maire said all options were on the table, vowing a “strong, unilateral and co-ordinated” riposte from Europe. “These unilateral measures are not acceptable,” he said.
Brussels is adept at surgical retaliation against the US, picking targets intended to inflict the maximum political damage in tight electoral contests. It is already looking at Harley-Davidson motorbikes, bourbon whisky, and Florida oranges.
The Europeans are deeply frustrated because the US and the EU have much the same grievance against China, which has been subsidizing its steel industry with cheap credit and energy. The Chinese are almost single-handedly responsible for the 800m tonnes of excess capacity overhanging the global market over recent years.
For Mr Trump, the dispute has become a visceral matter, scarcely amenable to reason. "What's been allowed to go on for decades is disgraceful. When it comes to a time where our country can't make aluminum and steel, you almost don't have much of a country. You'll have protection for a long time, " Mr Trump told business leaders.
The President has picked the toughest of three possible options presented by the US Commerce Department, opting for blanket tariffs rather than selective measures aimed at China and other countries deemed to be trade violators. It will not be clear until next week how much of this is bluster, and whether the White House intends to exempt close allies. The US Defence Department has urged caution in handling intimate friends such as Canada and Britain.
The British government was lobbying feverishly in Washington to try to head off sanctions in what is now becoming a painfully familiar routine. It failed to prevent a potentially devastating decision last year on the Canadian planemaker Bombardier that hits the operations of Northern Ireland’s biggest employer.
Richard Warren, policy chief of UK Steel, said: “there is still a lingering hope that these tariffs may not target the UK and EU.”
Britain exports £360m worth of niche “high-value” steel products to the US annually. Much of this trade would no longer be viable.
British officials had been given quite assurances over recent weeks that the UK would be spared but the White House itself is in chaos, with ultra-protectionists led by Peter Navarro in the ascendancy. There are reports that the director of the National Economic Council, Gary Cohn, is planning to resign in protest over the lurch towards protectionism.
Global markets have been complacent over the last year about the risk of radical moves by Mr Trump, deeming his bark is worse than his bite. They may have misread the politics of Washington, underestimating lag-times as the complex machinery of the US government slowly shifts direction.
The trade measures are suddenly hitting like a cannonade, with sanctions on Asian solar panels and washing machines already unveiled, and a highly-sensitive action over intellectual property theft and cyber-espionage expected soon. What is remarkable about the trade and aluminum tariffs is how indiscriminate they are. America’s aluminum producers had not even asked for help.
The conflict has escalated beyond the normal boundaries of trade diplomacy and risks taking the world into new Hobbesian order where rules give way to raw power.
Adam Posen from the Peterson Institute said the tariffs are plain “stupid” and will backfire in countless ways. “This is fundamentally incompetent, corrupt or misguided. Steel is just a tiny input in US GDP,” he said. Similar steel tariffs by the Bush administration in 2002 led to an estimated 200,000 American job losses and damaged US competitiveness. The measures were soon revoked, deemed an abject failure.
Sweden's white goods producer Electrolux said it was freezing a planned $250m investment in Tennessee following Mr. Trump’s demarche, citing worries about trade flows.
Canada and Mexico are among two of the states that would be hit hardest by steel tariffs. Bank of America said they are likely to be exempted (for now) while NAFTA talks continue in parallel. Canada’s foreign minister Chrystia Freeland said any restrictions would be “totally unacceptable” and vowed to defend her country's trade interests tooth and nail.
Mr Trump’s real target seems to be countries that run big surpluses with the US, which means chiefly East Asia but also Germany and Mexico. (Britain is in balance). Behind it is a bigger geopolitical struggle. The annual National Security Strategy report issued before Christmas took the fateful step of naming China as a rival that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity." It is a new Cold War.
Beijing responded to the Mr Trump's rhetoric with surprising caution on Friday, although the China Iron and Steel Association called it "a desperate attempt by Trump to pander to his voters, which runs counter to his ‘America First’ pledge. The US is now setting a very, very bad example.”
If China is the enemy in Mr Trump’s mind, the rival superpower has left no doubt it will hit back with equal force. It has even indicated that it might retaliate by dumping US Treasuries, just at the moment when the US bond market looks particularly fragile. This would blow up in everybody's face. We are entering a new era where great powers are implicitly threatening an economic variant of ‘mutual assured destruction’.
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