US president Donald Trump’s view on trade is simple. Exports and imports should be balanced, and, if not, then US exports should be higher than imports. Trumponomics leaves very little room for trade deficit in bilateral trade flows. This approach, president Trump believes, will build a strong economy and protect jobs. Interestingly, besides the large part of industry in the US, several people within his party have also been critical of this view even as he has found friends across the aisle on this approach. Not surprisingly, the steel and aluminium industry in the US has cheered this announcement.
Bringing in his argument on reciprocity, president Trump has recently announced that the US will impose tariffs, ranging from 10% on steel to 25% on aluminium. The countries that will be hurt most by this move, based on published trade figures, will be Canada, China, Brazil, Mexico, South Korea, Turkey, Russia and many European Union (EU) countries, to name a few.
President Trump tweeted that he was ready for a “trade war”. Reactions to the announcement have been different. In India, the impact is still being assessed and the feeling among industry and the policy makers is that the fallout may be minimal. Some industry officials feel that if exports fall, then there could be a glut in the market in the medium or long term. Since the exact time period when these tariffs will remain in the US is not clear, the assessment of impact will not be accurate for now.
The EU and China, on the other hand, have been threatening reciprocal tariffs on products that are of interest to the US. The EU, for instance, news reports say, has been drawing up a list of products where it can put reciprocal tariffs such as maize, orange juice, Harley Davidson motorbikes and jeans. They may also consider safeguard duties if these products are diverted through another country, EU officials have said. China too is said to be mulling tit-for-tat measures for products like soyabean. Therefore, if the announcement is converted into an order, then a Trans-Atlantic and Sino-US trade wars may become a reality. A tit-for-tat tariff is easier than taking up the issue at the dispute settlement body of the World Trade Organization (WTO), as the recent US moves to stop appointments to the Appellate body of the WTO has weakened the institution. The director-general of the WTO, Roberto Azevedo, naturally has been disturbed by the development and has issued a public statement, stating that the Geneva-based multilateral trade rules-making body will monitor the developments closely.
While countries are looking at the tit-for-tat reactions, what needs a little more understanding is whether the US can be taken to the WTO for dispute settlement. Technically, by imposing the tariffs, the US will be going way above the bound-tariffs under the framework of the WTO on most of these products. They are not in line with US’s WTO obligations, as many products of steel and aluminum are bound at zero by the US. The highest bound rate in the WTO for these products will be 12.5%, according to the WTO data base.
Further, in case of countries like Canada, which is the highest exporter of both these products, and Mexico, among the highest exporters of iron and steel products and aluminium products, the tariff move will hurt deeply since they are part of the North American Free Trade Agreement (NAFTA) that is still in place. This will have a huge impact on the regional trade agreement, hurting the value chains that would have developed over the years. This decision goes against the very core of a free trade agreement.
What is not stated in the announcement is the reason for choosing steel and aluminium for such action by the US. The decision looks unclear when we further look into the trade figures. In the case of steel and steel products, covered under the chapters 72 and 73 of the harmonised system of the World Customs Organization, and Aluminium, covered under the chapter 76, imports into the US have not been spiking abnormally and only contribute to 3.8% of the total imports by the US in 2017.
In fact, trade data available in the public domain show that between 2013 and 2016, there has been a negative growth in imports of steel and steel products into the US from nearly every country. In 2017, though imports have grown, the numbers are not alarming. The only alarming growth figures were from Vietnam, the UAE, Malaysia and Egypt. But these countries put together exported steel (Chapter 72) worth $897 million in 2017. The total imports of steel into the US from all countries were at $28,842 million in 2017 under Chapter 72 and at $39,115 million for products under Chapter 73.
In the case of articles of aluminium (HS chapter 76), the growth in imports in 2017—when taken for a period of 2013 to 2017—is high but not abnormal, given the demand in the US. The total imports of products under Chapter 76 into the US in 2017 stood at $39,115 million.
Given the fact that there is a lack of any significant spike in imports and that these products contribute to only about 4% of imports, president Trump’s decision seems to come from the fact that steel and aluminium represent the core of a manufacturing sector for any economy. By announcing a decision that will bring cheer to the core of the manufacturing sector, he is hoping to keep up the election promise of bringing jobs back to the US.
But, what maybe important for the US is to weigh the fact that such
knee-jerk announcements will further erode the already falling brand of the US as a country that supports open, transparent and fair trade. Importantly, the US move will help countries justify inward-looking policies that will now hurt companies and countries that have embraced globalisation over the last half a century.
TS Vishwanath, Principal advisor, ASL. Views are personal