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Steel, aluminum tariffs could open Pandora's box

Allies threaten retaliation and Republican lawmakers warn of economic ramifications.

by Andrew Mayeda

“America First” is finally starting to bite.

President Donald Trump’s March 1 announcement that he’ll slap stiff tariffs on imported steel and aluminum roiled markets, spurred warnings of harsh economic and political ramifications from some Republican lawmakers, and provoked threats of retaliation from allies such as the European Union.

Trump doesn’t intend to bow to pressure for exemptions for some nations when he signs the formal tariffs order as early as this week, according to two of his trade advisers, though there could be business exemptions in select cases. 

The announcement should have come as no surprise from a president who campaigned on an “America First” agenda. Since being elected, Trump has promised to fight on behalf of Americans against what he sees as unfair foreign competition. Even before his inauguration he vowed to implement a big “border tax” on businesses that shift jobs overseas. 

But in his first year in office Trump didn’t follow through on many of his trade threats, and his rhetoric eventually faded into the background as U.S. stocks surged to record highs. His decision to impose tariffs on solar panels and washing machines in January, though, gave a hint that more trade actions could follow.

‘Easy to Win’ 

Trump seemed to confirm those fears on Friday, tweeting “trade wars are good, and easy to win.” Investors are now coming to terms with the fact that the president may mean what he said -- and could be just getting started. Among other things, Trump has threatened to withdraw from the North American Free Trade Agreement and a trade pact with South Korea if re-negotiations don’t go his way, and he’s threatening to penalize China over its alleged unfair intellectual property practices.

The president’s decision to impose 25% tariffs on imported steel and 10% on aluminum raises the probability his administration will take a hawkish approach to other trade issues, such as talks to overhaul NAFTA, Goldman Sachs economist Alec Phillips said in a research note.

“We expect further disruptive trade developments over the coming months, including stalled NAFTA negotiations and potential restrictions on Chinese trade and investment,” Phillips wrote on Friday.

Bogged Down

Negotiators from the U.S., Canada and Mexico have been hunkered down in Mexico City for more than a week in the seventh round of talks to work out an update to NAFTA.

But talks have been bogged down over U.S. proposals designed to reduce its trade deficit, such as tighter content requirements on cars. Goldman sees the stalemate continuing, along with a “good chance” Trump will at some point follow through on his threat to withdraw from the pact. The talks look set to extend beyond a goal of end-March.

The next shoe to drop could be an investigation by Trump’s top trade negotiator, Robert Lighthizer, into whether China is flouting U.S. intellectual-property rights. Goldman expects the administration to impose restrictions on Chinese investment as a result of the so-called 301 probe, and may even go further. Trump has said he wants to impose a big “fine” as part of that investigation.

‘Been Here Before’ 

To be sure, it’s not the first time the U.S. has cracked down on foreign steel. Ronald Reagan and George W. Bush both imposed barriers on imports, but the U.S. steel industry has continued to struggle in the decades since. “We’ve been here before,” said Robert Holleyman, a partner at law firm Crowell and Moring LLP who served as deputy U.S. trade representative in the Obama administration. 

Tariffs probably won’t address China’s “massive excess capacity” in steel, the fundamental problem for U.S. producers, since Chinese steel exports account for a small share of U.S. consumption, Holleyman said. 

Nations are already starting to draw lines for trade battles. European Commission President Jean-Claude Juncker has said the bloc is preparing for possible retaliation that could target American iconic brands like Levi Strauss & Co. jeans and Harley Davidson Inc. motorbikes. Trump, on Twitter, threatened to tax imports of European vehicles if the EU retaliates.

China’s Vice Foreign Minister Zhang Yesui said Beijing doesn’t want a trade war, but wouldn’t allow its interests to be harmed. A steel industry representative from China, which the U.S. blames for flooding the market, called Trump’s plan for the duties as “stupid.”

National Security

With his move on steel, Trump is invoking a seldom-used clause of a 1962 law that gives him the authority to curb imports if they undermine national security. World Trade Organization rules allow members to restrict trade that imperil their “essential security interests.” Other countries are expected to challenge the tariffs at the Geneva-based trade body, in what will be the first test of the security provision since the WTO was born in 1995, said Gary Hufbauer, a trade expert at the Peterson Institute of International Economics in Washington. 

WTO Director-General Roberto Azevedo on Friday said there’s a “real” risk of worsening disputes because of the tariffs, and that a trade war doesn’t suit any nation’s interests. “The potential for escalation is real, as we have seen from the initial responses of others,” Azevedo said. “The WTO is clearly concerned at the announcement of U.S. plans.”

Hufbauer thinks the U.S. would win a WTO case, though. And even before then, other governments will be emboldened to impose their own barriers in the name of national security, he said. “That really opens a Pandora’s box,” said Hufbauer. 

--With assistance from Bryce Baschuk.To contact the reporter on this story: Andrew Mayeda in Washington at [email protected]

To contact the editors responsible for this story: Brendan Murray at [email protected]

Sarah McGregor, Ros Krasny

© 2018 Bloomberg L.P 

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