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The world steels for US tariffs

Image credit: kenjisama (Flickr: Creative Commons)

On the campaign trail Mr Trump often railed that China and others were dumping goods on the world market below cost-price. This, he claimed, was driving American companies out of business and causing job losses. It was not surprising, then, that when in March President Trump announced plans to introduce a 25 per cent tariff on steel and a 10 percent tariff on aluminium. These were eventually imposed on 1 June.

Steel and aluminium are frequent targets of anti-dumping measures. Blast furnaces have limited capacity to vary production and can be irreparably damaged if not in constant use. This means that steel producers have an incentive to discount the price of their wares even if it results in a short-term loss as ceasing production will inevitably result in a significant loss of capital. Moreover, China has long maintained subsidies for steel production leading to oversupply which has hurt many countries’ steel industries.

Whilst the tariffs will protect producers, others that use steel products will suffer from higher prices. Buildings and infrastructure account for half of America’s steel consumption which means housing prices could be affected. Another 13 per cent is used by the automotive industry which will drive up prices of American cars and reduce their competitiveness on international markets.

The bigger concern is that any benefits to American steel and aluminium producers may be vastly outweighed by the effects of a wider trade war. Rather than target a single country as anti-dumping measures generally do, the tariffs announced by President Trump will apply to 81 percent of steel imports and 96 percent of aluminium imports, including close US allies such as the EU, Mexico, Canada and Japan (Australia avoided this fate by successfully lobbying the Trump administration).

Even just limiting the tariffs to China - the real target from Mr Trump’s rhetoric and supplier of half the world’s steel (see graph) - is potentially threatening to world trade. China has threatened to introduce tariffs on more than 100 American industries, including soybeans, vehicles and aircraft, and even threatened that existing trade agreements will become null and void.

America’s trading partners are likewise threatening to impose tariffs on US$43 billion of US exports. Thus, for every American job gained in steel and aluminium manufacturing an estimated 16 jobs would potentially be lost elsewhere.

Should a trade war break out, as countries impose tit-for-tat tariffs, the economic costs would grow. They may even threaten the international trading system and undermine the World Trade Organisation, as affected parties retaliate before the organisation issues a ruling (the EU has filed several complaints).

Countries may eventually revert to the mercantilism of the inter-war years if international trade rules are disregarded. The justification for the tariffs, on the grounds of national security, is a slippery slope. National security can be defined so broadly that it is open to abuse. Moreover, once anti-dumping measures have been activated they become entrenched and it is difficult to remove them. The more anti-dumping measures are used, the more frequent they become.

Anti-dumping measures can protect local industries, especially if the nature of the dumping is predatory (i.e. intended to drive competitors out of business). They can also raise much needed government revenue. But governments should think very carefully about their use. Tariffs shield inefficient producers from competition, drive up prices for consumers, and increase the prices of exports using steel and aluminium components. In sum, their outcome on welfare is debatable.

It should also be remembered that whilst anti-dumping measures help insulate the affected industries from uncompetitive practices they also have some unintended consequences. Dumping essentially involves subsidising products to reduce their cost on international markets. Ultimately, the cost of this subsidy is borne by taxpayers of the sending country. These taxpayers are essentially paying taxes to reduce the price consumers in another country pay. This is undoubtedly an inefficient use of taxpayers’ money in the subsidising country. Lower prices will spur innovation in the receiving countries, as exporters of steel and aluminium products must find ways to cut costs and become more efficient or risk folding.

It must be noted that for all their complaints, both the US and European nations are guilty of dumping themselves. Subsidies for their farmers often lead them to dump agricultural products on developing markets, driving the latter’s farmers to the brink of bankruptcy. Developing countries meanwhile, should they wish to impose anti-dumping measures, have far less wherewithal to respond in kind.

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