The US trade deficit in 2017 in goods and services was $566 billion, though this balloons to $810 billion if you exclude services.
America’s President Donald Trump announced import duties of 25 per cent and 10 per cent on steel and aluminium respectively on February 2. The New York Times noted that Mr Trump has been spoiling for a trade war since he began electioneering. The announcement nevertheless took both America’s allies and other countries by surprise. A Trump soundbite, disparagingly recounting Prime Minister Narendra Modi telling him about reducing Indian import duties on Harley Davidson motorcycles from 100 per cent to 50 per cent, went viral. Should the US be thanking India for that, President Trump asked sarcastically.
The rationale for the US decision defies logic. For starters, the decision uses national security grounds, a rarely used World Trade Organisation (WTO) rule which is difficult to review. President George W. Bush had similarly imposed duties on steel imports in 2002, for three years, that was subsequently held to be infringing WTO’s global trade rules. Next arises the question of whether it covers countries like Canada, Mexico and South Korea, with which the US has trade agreements that should preclude such action.
The US trade deficit in 2017 in goods and services was $566 billion, though this balloons to $810 billion if you exclude services. Of this, the deficit with China alone is $342 billion. However, the duties on steel and aluminium are unlikely to affect China much as it is not even in the top 10 countries exporting these products to the US. China’s strength is in manufactured goods, which may have steel or aluminium content, but would not be affected. But the argument runs that President Trump has just begun his protectionist war, and more duties on more products may follow. The likelihood of a trade war spinning out of control has rattled stock markets across the world.
The leaders of the G-20 economies have strongly condemned the US move, ranging from Canada to the European Union and Australia. The Chinese reaction, however, remained muted. After all, with Mr Trump sometimes the bark has been worse than his bite, and his policy tweaks are often campaign promises fulfilled, mostly in a pro forma manner. Interestingly the announcement, by design or coincidence, came on the very day that Liu He, Chinese politburo member and economic adviser to Chinese President Xi Jinping, began his talks with the US. This was reminiscent of Mr Trump sanctioning a punitive missile attack on Syria as he hosted Mr Xi at his Mar-e-Lago resort in Florida last year.
The larger question is whether Mr Trump had weighed all factors before announcing the move, from which the advantages may be lopsided domestically. While some benefit may go to 200,000 jobs in US smelting industries producing those two items, the negative impact on those using those products in their manufacturing may impact 6.5 million jobs. For instance, aluminium goes into production of cans which are increasingly vital for the beer and soft drinks industry. Other big groups that consume them are manufacturers of aircraft and cars, thus affecting behemoths like Boeing and General Motors, whose cost of inputs may rise.
The linkages of supply chains among the three-member North American Free Trade Agreement (Nafta), comprising Canada, the US and Mexico, are problematic. Car manufacture demonstrates this dilemma, as the chassis may be made in the US but the engine and wiring may come from Mexico while the electronics could be from Canada or South Korea. Canada in fact buys half of America’s steel exports. Thus, it was not surprising that leaders of these countries warned of retaliatory duties on US products. Canadian Prime Minister Justin Trudeau called the move “absolutely unacceptable”. The three US products that may straightaway face wrath abroad are Harley Davidson motorcycles, manufactured in the constituency of Speaker Paul Ryan, Kentucky bourbon and blue jeans, with similarly sensitive political implications. Thus, it was not surprising that Mr Trump chose motorbike exports from India having lesser duty in the US than Harleys coming to India even though out of India’s over $1 billion two-wheelers export only $11 million or so go to the US.
As they say, it takes two to tango, and Mr Trump may be about to discover that fundamental reality. Canada and Mexico are the first and third largest agricultural markets for the US. South Korea imports US beef, corn, pork, etc. Turkey imports US cotton and Brazil wheat and dairy. Agriculture can be a vote-sensitive sector, particularly in regions in the US Midwest where support for Mr Trump is strong. Moreover, all steel jobs lost are unlikely to reappear in the US as automation and changes in steel production technology would condition that. Mr Trump hectored after a crescendo of EU threats that he would impose duties on European cars if it persisted. While it is true that the EU imposes 10 per cent duty on car imports while the US duty is just 2.5 per cent, the the preference for European, Japanese or Korean cars is based on value for money or simply value for quality. Moreover, many foreign car manufacturers have set up American plants for indigenous production.
Mr Trump may well believe, as his tweet declared, that “trade wars are good and easy to win”, but the reality can be grey and troublesome with no clear winners. George W. Bush had to withdraw similar duties that he imposed in 2002. The real issue is whether it is in the interests of the US to undermine the global trade regime that it had helped to construct, culminating in the setting up of WTO. The “national security” exception can become more widely misused by other nations, seeing America’s behaviour. India has been resisting US attacks on its food procurement programme as non-compliant with WTO rules. Protectionism ill suits the evangelical erstwhile supporters of free trade. When rule-makers turn rule-breakers, the world is bound to be a less stable place.