Updated: Nov 21, 2018
Author: Anran Liu Research Analyst
Earlier this week, the Trump administration imposed tariffs on imports from the closest US neighbors and allies, all of whom pledged to retaliate in the form of additional tariffs. President Donald Trump is chasing an aggressive strategy, all in an effort to decrease the U.S. deficit regarding merchandise trade. Specifically, tariffs on aluminum and steel imported from Canada, the EU, and Mexico will be imposed as early as Friday this week. In addition, the administration is also considering placing tariffs on motor vehicles and parts.
The effect of the decision flowed through the markets, with the Dow Jones Industrial Average closing 1% lower or 24,415.84 on May 31, 2018. The Trump administration stated they would be open to deals that involved dropping the metal tariffs. “We continue to be quite willing and indeed eager to have further discussions with all of those parties,” said Commerce Secretary Wilbur Ross on Thursday, May 31.
The Trump administration is citing national security to justify the tariffs, arguing that America’s allies and rivals are employing unfair trade policies to undermine the viability of critical U.S. industries, starting with steel and aluminum. The administration says the national security justification comports with U.S. law and a special security exception at the WTO. On May 31st, 2018, the White House said the [tariffs] “have already had major, positive effects on steel and aluminum workers and jobs and will continue to do so long into the future.” The policy risks higher prices on imports, painful retaliation against U.S. exports and longer-term strife with allies if the Trump administration alienates politicians in allied democracies. Members of the Republican Party also criticized Trump’s move. Nebraska’s Senator Ben Sasse described the decision as “dumb” and compared the tariffs to the disastrous Smoot-Hawley tariffs that are thought to have worsened the Great Depression. “‘Make America Great Again’ shouldn’t mean ‘Make America 1929 Again" he said.
Kevin Brady, the Texas Republican chairman of the House Ways and Means Committee, called for America’s allies to be exempted from the tariffs, pointing out that they were hitting the wrong target. “When it comes to unfairly traded steel and aluminum, Mexico, Canada and Europe are not the problem – China is," he said. He warned that officials “will need to come to Capitol Hill to provide answers about the indiscriminate harm these tariffs are causing our local businesses.”
Furthermore, the reaction from Canada was both swift and blunt: Canadian Prime Minister Justin Trudeau made a statement regarding Canada’s introduction of a 25% steel tariff from the US, and a 10% on aluminum. In addition, the additional tariffs included other US goods such as food and agricultural products. This list of tariffs is expected to be made public on July 1st and is currently in consultations in Ottawa. However, the issue with retaliation through tariffs is that they do not work if your opponent is richer than you. With Canada being much smaller than the US and dependent on trade links, there is open pressure to agree to a more unfavorable version of NAFTA, given Trump’s publicly aggressive strategy on tariffs.
Regarding Mexico, its Ministry of Economy said it would also retaliate with tariffs on US goods. Specifically, the list will include steel, lamps, berries, apples, cold cuts, and various cheese products. The effect is estimated to be set at an amount comparable to the level of damage of US’ tariffs.
Lastly, the EU will be releasing its own duties on US goods as well, estimated to be worth approximately $7.5 billion USD. The list will include steel, motorcycles, and some agricultural products; and will be effective as soon as June 20th. In addition, the EU will be pursuing a case against the US to the World Trade Organization this Friday - citing the steel tariff as an unfair practice that plays right into old protectionism methodologies. “This is protectionism, pure and simple,” the EU’s top executive, European Commission President Jean-Claude Juncker, said Thursday. “We will defend the Union’s interests, in full compliance with international trade law.”
Meantime, as U.S.’s plans to impose levies on imports from its allies prompt anger and retaliation from countries including Canada and Mexico, China is trying to line up other countries against Washington by enticing them with greater access to Chinese markets. On Friday, China’s Finance Ministry released a list of more than 1,000 products that will be subject to lowered import tariffs, starting July 1.
It is hard to overstate the damage that the U.S.’s behavior is doing to international relations. It is alienating its closest allies and in doing so, threatening the global trade landscape.
1 https://finance.yahoo.com/ - Yahoo Finance
2 https://www.bbc.com/news/world-us-canada-44320221 - BBC News (May 31, 2018)
3 https://www.nytimes.com/2018/05/31/us/politics/trump-aluminum-steel-tariffs.html - The New York Times(May 31, 2018)
5 https://www.ft.com/content/1b4c56f6-64f2-11e8-a39d-4df188287fff - Financial Times (May 31, 2018)
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