OF TARIFFS AND TRADE

OF TARIFFS AND TRADE

By Alba Leon

For decades, the United States and the European Union championed an international political and economic system based on institutions such as the World Trade Organization, whose mission is ensuring that trade “flows as smoothly, predictably and freely as possible.” [1]

Yet, the balance of power in this system has been dramatically altered with the administration of Donald Trump. Just last year during the World Economic Forum, China signaled that they would be willing to champion free trade, as well as the Paris climate change accord. [2] The country, which has generally been seen as fiercely protectionist, emphasized that nobody would benefit from a trade war or from closing borders. [3] The former champion of free trade, the United States, seems to now have moved its policy towards a more protectionist stance.

Less than a week ago, it was announced that Gary Cohn, President Trump’s economic adviser, would resign in disagreement about the president’s proposed tariffs on aluminum and steel.[4] The former trader helped the administration navigate the treacherous political waters and pass a tax reform that was not without its detractors. He was well regarded by the president and accepted by Trump’s opponents, even if begrudgingly. 

Cohn’s departure has everything to do with his advocacy for free trade, which put him at odds with President Trump. The adviser was unable to change Trump’s mind when it came to tariffs on aluminum and steel, that were announced on Thursday.

Tariffs are a sort of tax on the import of products. This means that for non-US companies that produce steel and aluminum, it will become more expensive to sell their wares in the US. Trump has argued that these tariffs are needed to defend national security, as both materials are critical to the US’ industrial base and defense. [5]

However, the Department of Defense (DoD) has already said that they can meet the requirements for such materials with internal production. Moreover, “DoD continues to be concerned about the negative impact on our key allies regarding the recommended options within the reports.”[6] And these tariffs would not apply to border countries: Mexico and Canada would be exempt from these tariffs indefinitely or, at least, pending the proposed renegotiation of the North American Trade Agreement (NAFTA). [7] Other countries, like Australia, may also be able to negotiate either a waiver or a lowering of the tariff, but this remains unclear. So the national security argument remains, at best, incomplete.  

Trump also argues that the lack of import tariffs has been damaging local production, and American workers. But is it really that simple? If tariffs are imposed, will jobs return to those areas of the US that once were prosperous because of steel mills and aluminum plants? What does a 25% import tariff on steel and 10% on aluminum mean for people in the United States once the dust is settled?  

According to a study by the Trade Partnership, the tariffs could ultimately cost more American jobs than they would create. While “the number of American workers in the metals industry could increase by an estimated 33,464 jobs, the decrease in other industries would be more significant: an estimated 179,334 jobs. This means that the net loss could total 146,000 jobs.” [8]

And what about the international system? If we agree that free trade has helped bring more security and stability to the world, this is definitely one step in the wrong direction. Without a more stable political situation, it is hard to predict what could happen next with the Trump administration but there is a real fear that other products could be in the pipeline for an increase in tariffs, and that the WTO system could be upended for good. What we know so far is that both governments and multinationals have made pronouncements regarding this practice. As mentioned before, China is happy to proclaim itself a disruptor that would help the world continue on its free trade path. And the European Union is also ready to apply retaliatory tariffs. As Cecilia Malström, EU Commissioner for Trade said after the measure was announced, “unlike these proposed US duties, our three tracks of work are in line with our obligations in the WTO. They will be carried out by the book. Protectionism cannot be the answer, it never is.” [9]

While change and upheaval are always part of the development of international relations, there is now a sense that this change is the more unpredictable because of the internal situation in the US, which is perceived by many as chaotic. For the time being, the only thing that can be done is wait and see whether these measures help the US economy and, more importantly, whether other countries turn towards our system of institutions and agreements, or if this action is the first domino to fall, a sign of uncertain times to come.

Sources

[1] https://www.wto.org/

[2]https://www.theguardian.com/bu…

[3]https://www.ft.com/content/141…

[4]https://www.cnbc.com/2018/03/0…

[5]https://www.theguardian.com/us…

[6]https://www.commerce.gov/sites…

[7]http://www.cbc.ca/news/busines…

[8]http://fortune.com/2018/03/06/…

[9]http://europa.eu/rapid/press-r…