Mr Trump announced 25 per cent tariffs on all imports of steel and 15 per cent tariffs on aluminium imports in early March. He has now announced 25 per cent tariffs on US$50 billion of imports from China. The main justification is to protect American jobs and businesses from supposed unfair trade policies by other countries.
Even if the reasoning was right — and it is not — it makes no sense shooting oneself in the foot with protectionist trade policies. Mr Trump’s actions will make American consumers and businesses worse off. Steel is an input into many industries and a lot of jobs will be lost to save some in steel works. American consumers will be significantly worse off, having to pay more for many items. This is a reduction in real incomes for Americans.
The damage is not just to American consumers and workers. The United States is the largest economy in the world and its trade barriers hurt the global economic community.
Reciprocal trade practices are also cited as a reason for these misguided policies. If China or any other country chooses to have a 25 per cent tariff on imports of American cars, it hurts Chinese consumers. Hurting American consumers to get back at China may make some feel good, but as the Chinese saying goes, to kill 1,000 enemies costs 800 of your own.
The idea that US tariffs on Chinese imports are justified in the face of the theft of intellectual property from US firms in China is a worrying commonplace in US policy discussion. Pro-trade Republican members of Congress support the measures. The Chinese intellectual property protection regime has come a long way, though it still has a long way to go. But stopping Chinese investment and goods coming into the United States is like throwing your lunch money away so the school bully can’t take it. The sensible approach is to negotiate the issues at stake through a bilateral investment agreement.
It is unclear whether President Trump’s strategy seeks leverage for negotiation, whether he’s intent on misguided economic suicide, or both.
The danger is that China and others, like Japan, retaliate. There will be immense political pressure to do so in these countries. The rules-based multilateral trading system of the WTO was to put in place as a backstop to avoid such beggar-thy-neighbour policies. This is a classic prisoner’s dilemma problem of countries acting in their narrow self interest, which leads to worse outcomes than if there is trade-policy cooperation. The WTO binds that cooperation.
There are no winners in a trade war; everyone loses.
Australia, Canada and Mexico have been given exemptions from the tariffs on steel and aluminium, and now US Trade Representative Lighthizer is suggesting some other allies may also be given a temporary stay of execution. The United States has a trade surplus with Australia, and Australia lobbied hard to achieve the exemption. Canada and Mexico are two of the four largest sources of steel imports for the United States and their exemption was given in the context of the ongoing NAFTA renegotiations. The policy is extreme but the debate in Washington has shifted to arguing that these tariffs are okay so long as allies are exempted. This makes no sense, economically or politically, other than in a state of war.
What Canada and Mexico had to give or are expected to give in return for exemption on tariffs is not clear. There was apparently no formal quid pro quo deal for Australia but it’s not clear that Mr Trump won’t expect something in return at a later date. Australia may have left itself open to political blackmail.
Countries are making choices that take them outside the rules-based order. These choices will become starker as the United States continues down the path it has chosen and other countries are pressured to retaliate. At threat is the open rules-based order itself.
The US threat to the global trading system will only be met by a concerted and collective response. That response needs coordination and a deliberate choice to double down on the rules of the global trading system by holding the line on US protectionism. Japan, Australia, Canada and others will need to lead the coalition of open economies. China, which may seem like an unlikely coalition partner, will be key.
As the world’s largest trader and second-largest economy, China has more to lose than most, but also has the weight and interest to hold the line. China will find it too difficult to avoid retaliation against provocation if it acts alone, but China’s banding together with the global community to hold the line on the escalation of protection may work.
Shiro Armstrong is Director of the Australia-Japan Research Centre and Asian Bureau of Economic Research at the Crawford School of Public Policy at The Australian National University and Editor of the East Asia Forum.