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Business / Finance / Markets / Money

Trundling to Trade War

Trundling to Trade War

With a national security fig leaf?

From NYT:

The U.S. Commerce Department has recommended that President Donald Trump impose steep curbs on steel and aluminum imports from China and other countries ranging from global and country-specific tariffs to broad import quotas, according to proposals released on Friday.

The long-awaited unveiling of Commerce’s “Section 232” national security reviews of the two industries contained global tariff options of at least 24 percent on all steel products from all countries, and at least 7.7 percent on all aluminum products from all countries.

The Section 232 provisions are described in this Econofact article, which asks a key question:

The question is whether the threats posed to national security are genuine, or merely a means of protecting domestic industries under the guise of national security.

Even granting a legitimate national security rationale, two further questions arise:

  • Will national security be enhanced or diminished by these measures? Higher input costs might reduce the competitiveness of upstream industries.
  • Will the implementation of fairly rarely invoked Section 232 measures spark retaliation and/or a trade war?

The Commerce Department announcement and two memoranda are here. I find the reports unconvincing. For instance, in the steel memo, it’s noted:

The Department found that demand for steel in critical industries has increased since the Department’s last investigation in 2001. The 2001 Report determined that there was 33.68 million tons of finished steel consumed in critical industries per year in the United States based on 1997 data.7 The Department updated that analysis for this report using 2007 data (the latest available) and determined that domestic consumption in critical industries has increased significantly, with 54 million metric tons of steel now being consumed annually in critical industries.

The 2017 annualized U.S. capacity is estimated at 113.3 million metric tons, production at 81.9 mmt. By this accounting — accepting the Commerce Department’s definition of critical industries — it’s not clear a Section 232 action is justified.

The stakes are high. From Bown (2017):

… Under Section 232 of the Trade Expansion Act of 1962, the President could implement a broad set of import restrictions with very
little procedural oversight.1

While there are national security exceptions embodied in the WTO agreement—in particular, GATT Article XXI—countries have rarely invoked them, mostly out of systemic concerns. Suppose a trading partner with exporters adversely affected by such restrictions were to file a formal WTO challenge. Losing such a dispute would be bad systemically; it provides an aggrieved trading partner license to invoke the exception itself whenever it had a protectionist inclination. America’s invocation of the national security exception on steel invites China to invoke it on soybeans or the European Union to invoke it on digital or Internet services. But winning such a dispute could be worse; such a ruling against the United States could provide the Trump administration with just the political justification it seeks to abandon the agreement altogether.

Further discussion at Econofact, Econbrowser (May), Econbrowser (June), Econbrowser (July).

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