President Donald Trump has made good on his promise by imposing tariffs of 25 percent and 10 percent, respectively, on steel and aluminum imports. He handed neighbors Canada and Mexico an olive branch by exempting them -- as long as the U.S. gets what it wants in talks to revamp the North American Free Trade Agreement -- and signaled he could do the same for other allies. The tariffs prompted an outcry from trading partners, Republican lawmakers, economists and business leaders. Talk of tit-for-tat reprisals by the European Union, China and other trading partners raises the prospect of economic growth slowing and stock and bond markets reeling out of fear that Trump just started an all-out trade war. Did he?
1. What is a trade war?
The dictionary says it’s “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the threatened retaliation from other countries certainly meet that definition, but so do centuries of protectionist skirmishes by numerous countries in countless sectors, not just the U.S. and not just in steel. What could make this episode more war than skirmish is Trump’s invocation of national security to justify tariffs -- which could open a Pandora’s Box of similar claims by other nations -- and his threat to further punish any country that reacts by imposing counter-duties.
2. Does Trump say it’s a trade war?
That’s what he suggested with a March 2 Twitter post declaring trade wars “good, and easy to win.” Three days later, discussing his proposed tariffs, he said he didn’t think they will lead to a trade war. Trump’s focus is the U.S. trade deficit, which shows the country imports hundreds of billions of dollars more than it exports. Stepping back from trade deals like Nafta and the Trans-Pacific Partnership also appeals to Trump’s base of voters in America’s Rust Belt. But talk of a trade war is alarming to many U.S. business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth if the U.S. turns protectionist and other countries retaliate.
3. Who might retaliate?
The EU warned it would respond with its own 25 percent tariffs on $3.5 billion of American goods. The bloc is targeting iconic U.S. brands produced in key Republican states on a range of consumer, agricultural and steel products. The strategically chosen list includes motorcycles, blue jeans and bourbon whiskey. In turn, Trump warned that he would impose a 25 percent penalty on European car imports if the EU carried out its threat. Chinese officials are looking at a range of trade penalties on U.S. imports, from soybeans to sorghum. China’s foreign minister, Wang Yi, vowed a “justified and necessary response” to any efforts to incite a trade war.
4. Who wins in trade wars?
No one, if history is any guide. When President George W. Bush raised steel tariffs in 2002, U.S. gross domestic product declined by $30.4 million, according to the U.S. International Trade Commission. The U.S. lost about 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved. The World Trade Organization also ruled that the Bush tariffs were illegal.
5. Could these steel tariffs backfire, too?
Maybe, since many more people are employed in industries that buy steel to make products, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policy makers, who might feel the need to raise rates more aggressively than planned. On the other hand, if the tariffs result in job losses and the economy slows, the Fed might want to ease the pace of rate hikes.
6. What’s the role of the WTO?
The arbiter of international trade disputes was born in 1995 out of a set of agreements struck by countries trying to reduce trade barriers. If a government’s complaint about another nation’s trade barriers is seen as grounded, the WTO recommends acceptable retaliation. But tit-for-tat actions that unfold quickly might test the WTO’s somewhat ponderous deliberative process. In the case of steel, Trump is invoking a seldom-used clause of a 1962 U.S. law that gives him the authority to curb imports if they undermine national security. Under WTO rules, countries can take trade actions to protect “essential security interests.” Other nations could challenge the validity of the U.S. use of that clause. They also could copy the U.S. move by citing national security to block imports themselves.
7. What happened in previous trade wars?
One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 and often blamed for deepening the Great Depression. The law hiked U.S. tariffs by an average of 20 percent. The duties originally were proposed to protect American farmers but many other industries lobbied for and won similar protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff. In the 1980s and 1990s, Japan was the target. Ronald Reagan slapped tariffs on Japanese electronics and motorcycles, and forced Tokyo to accept quotas on cars and steel. Bill Clinton picked up the torch in the early 1990s by threatening steep tariffs on Japanese cars and demanding that Japan rein in its current-account surplus.
8. Are tariffs the only weapon in trade wars?
No, there are many others. Clamping down on Chinese investments in the U.S., which Trump may already be planning, is one example. Talking down, or manipulating lower, one’s currency is another. Countries through the years have used other means to keep foreign goods out and protect homegrown companies, a practice known as mercantilism. Trump accuses China of using government subsidies to prop up its domestic industries. Some practices are overt, such as quotas, and others covert, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.
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