World economy: Going to war over trade. Really?

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WORLD ECONOMY

In his regular world economy column Dave Deruytter attempts to make sense of the impending boxing bouts between Trump… and anyone who will take him on.

US President Trump has imposed import tariffs on foreign steel and aluminium, at respectively 25% and 10%. The EU condemns the initiative and wants at least an exemption, otherwise it may retaliate with tariffs on some US products. China condemns the plan strongly, but without mentioning specific counter-measures – the Chinese wants to see what is going to happen in concrete terms.

What is behind these US import tariffs?

President Trump is notorious for his ‘America First’ policy, by which the buying of US made products is favoured. He has sent strong messages to business in the past that industry should not relocate production nor produce abroad to import those products back into the US. Furthermore, the US already imposes tariffs on the import of solar panels and washing machines.

The instalment of import tariffs on steel and aluminium is another step in that strategy. This time though, there is the mention of national security as an extra reason for the import barriers. The Trump administration uses a 1962 legislation to back it up. But that legislation can only be applied on a very small part of the steel that is imported in the US and it does not apply to aluminium imports at all. There may be a broader security message from president Trump though, a hint to the EU and China that the US wants its ‘allies’ to act stronger with the US on world security. For the EU one could see it as a strong message to the EU Member States that do not contribute as much as promised to NATO or to their own national defence. For China it may be a hint that it is not firm enough in the application of the trade sanctions towards North Korea.

The US Administration has said that countries can obtain an exemption from the tariffs if they come and explain, one by one, the reason why they should be exempt. But at the same time, president Trump threatens to go even further with trade barriers, at least for the EU. If they do not allow US genetically modified beef or agricultural crops into the Union, he wants to tax the import of European cars into the US.

Canada and Mexico currently do not have to pay the import tariffs because of the NAFTA (North Atlantic Free Trade Agreement). Still, as the NAFTA agreement is under renegotiation, the tariffs should be seen as a means for the US to put pressure on those two countries to accept more favourable US terms under NAFTA. If not, they risk that the US will withdraw from NAFTA and impose the tariffs.

Ever freer world trade has brought extra wealth and more peace over the past decades to all countries involved with international trade and investment.

Why is the US coming up with these measures then?

Of course, domestic populism is part of the story. ‘America First’ sounds great with the blue-collar workers and with those out of work, because they believe that protectionism will make sure that they will keep their jobs or find one. In the short run that may be true, but not in the medium and longer term, as companies risk becoming complacent, and ‘forget’ to improve efficiency or move up the value ladder in their industries. The tariffs will then lead to a loss of competitiveness at US companies and an increase in inflation in the medium and longer term.