Once A Role Model, US Sets Dangerous Example On Trade

U.S. leadership on trade once set an example that helped lower barriers to international commerce, as other countries followed the world’s largest economy into the global trading system. But President Trump’s use of a national security loophole to slap tariffs on steel and aluminum imports now sets a bad example that other countries may follow.

Global trade rules recognize that it is each country’s sovereign right to look out for its own interests. If a country truly believes that an imported good threatens its national security, then its government should be free to restrict those imports. President Trump recently invoked the national security justification for steel and aluminum tariffs. But the grounds for those actions appear shaky at best, and at worst are a thinly veiled excuse for garden variety protectionism.

Trump has indicated the tariffs give him negotiating leverage, and he may be right. But if other countries follow our bad example and use the national security justification frivolously, then we risk opening the global trading system to major roadblocks.

This wouldn’t be the first time bad ideas about trade take hold in America, spread abroad, and end up hurting us. Take “antidumping and countervailing duties”—import taxes imposed on U.S. importers when they buy from someone selling at a price deemed by the U.S. Commerce Department as too low.

Most economists and lawyers see “selling at less than fair value” as more of an antitrust issue that would rarely warrant import taxes. Earlier findings by Federal Trade Commission economists questioned the fitness of antidumping and countervailing duties. But special interests and the political theater of “getting tough on trade” won out, and the number of these cases in the United States dramatically increased in the 1980s, and continued to increase over the next two decades.

Many of our trading partners complained at the beginning, but to no avail. Eventually other countries adopted their own versions of the antidumping laws. Before long, Mexico, India, China, Thailand, and many others started accumulating their own list of foreign products judged to be unfairly priced. Trade flows from the United States were often the targets of those duties.

We may be on the verge of seeing a repeat with Section 232, a relatively arcane trade law that allows the president to impose tariffs on imports deemed to be a national security threat. In March 2018, President Trump resurrected this tool and announced a 25% tariff on steel imports and 10% tariff on aluminum imports in the name of national security. The administration launched another Section 232 investigation into the imports of autos and auto parts in May 2018, and recently another case for titanium sponge (a form of titanium with a high strength-to-weight ratio that is used by the aerospace industry).

It is far from clear whether imported steel was ever a national security threat in the first place. Defense Secretary Jim Mattis said that U.S. military needs for steel and aluminum represent just 3% of U.S. production.

Since the Section 232 tariffs have been in place, U.S. steelmakers have welcomed the higher prices. Some steelmakers have even reported record earnings, mostly due to higher prices rather than volume.  Higher steel prices may be good for their bottom line, but not for U.S. manufacturers that use steel as an intermediate input. Those higher steel prices are hurtingAmerica’s industrial competitiveness both here and abroad.

The Department of Commerce instituted a tariff exclusion process to alleviate these types of downstream tariff costs on U.S. manufacturers. They expected 4,500 exclusion requests from the steel tariff and 1,500 from the aluminum tariff. As of December 20, 2018, U.S. manufacturers have filed44,389 tariff exclusion requests for steel and 6,013 for aluminum. In other words, Commerce grossly underestimated what the tariffs would cost American businesses.

Seven countries are attempting to challenge the Trump administration’s national security argument in the World Trade Organization. But that might be a hard case to win because Article XXI of 1994’s General Agreement on Tariffs and Trade (GATT) permits WTO members to forgo their GATT and WTO obligations for national security reasons.

The national security exemptions were instituted in case of extreme circumstances. They were not meant to be used as negotiating leverage, or to protect or sustain domestic industry.

The United States is showing other countries the playbook to get around their WTO commitments. The risk is that our trading partners will follow our bad example and start to impose tariffs and trade barriers in the name of their own national security. If the United States and others continue down this path, we could undermine the entire global trading system.