Trump's tariff moves send challenge to the trade status quo

Proposed tariffs on steel and aluminum spark fear of a trade war, but many policymakers admit the status quo of globalization isn't satisfying, either.

In the United States and overseas, the Trump administration’s new plans to place sizable tariffs on steel and aluminum imports have caused shock and dismay.

Stock markets have reeled. Longtime trade partners are threatening retaliation. Critics say such “protectionism” could spark a trade war.

Yet President Trump has cited protection of industry as a virtue amid a global glut.

“You will have protection for the first time in a long while, and you’re going to regrow your industries,” he told US metals-industry leaders Thursday. The tariffs of 25 percent on steel and 10 percent on aluminum “will be for a long period of time.”

The differing views of protection mark an age-old debate about trade that postwar policymakers in the West thought they had solved. Trade is good; trade wars are self-defeating, they believed. And yet, there’s growing recognition among these policymakers that an era of rapid globalization has been accompanied in many nations by rising inequality and social upheaval, which has hit regions like America’s industrial belt hard.

So while many disparage Mr. Trump’s solution as a return to failed policies of the past, some recognize that the status quo is also untenable.

“What happened today is a symptom and a response to a terrible [problem],” says University of Maryland economist Peter Morici. “It’s very easy to villainize Donald Trump” and to say he “has been disassembling the global international order.” But the trade views of Trump and many who voted for him follow years of “condescension and disinterest and abuse from our foreign trading partners.”

Mohamed El-Erian, chief economic adviser at Allianz, argued in a published commentary this week that the world hasn’t yet come to grips with how to replace the “Washington consensus” – which essentially saw more-open markets as an inexorable driver of rising prosperity and international harmony.

The question at issue is whether the concerns tied to globalization – from worker displacement to China’s aggressive efforts to grab leadership in key industries – will be met. And more narrowly, will Trump’s “protection” effort nudge the world toward greater trade fairness, or backfire?

“The real worry is that this marks a turning point in US trade policy, away from bluster and brinkmanship toward actual protectionist measures,” Andrew Kenningham of Capital Economics wrote Thursday in an analysis for clients.

Why is Trump aggressive?

Defenders of the Trump policy say there’s good reason to take such an aggressive stance, potentially pitting itself against the rest of the world. (Trump could also choose to exempt certain steel-producing nations, such as neighboring Canada and Mexico, from the tariffs.)

For one thing, the current set of trade rules hasn’t protected the US steel industry from devastating losses. Since China joined the World Trade Organization (WTO) in 2001, US steel production had fallen by 13 percent by 2016, while China’s subsidized industry had increased by 433 percent. The US decline is worse than other big producers, such as Germany and Japan. But Canada, France, and especially Britain have seen bigger falls.

And solutions to the problem have been slow in coming. The Obama administration worked for a multilateral approach, which finally led to the creation of the Global Forum on Steel Excess Capacity in 2016. After publishing a report on the problem, it held its first ministerial-level meeting three months ago and published a package of recommendations urging nations to reduce excess steel capacity.

“The time for talk has long since passed,” says Alan Tonelson, founder of the RealityChek blog, which focuses on manufacturing economics and trade. In his view, the only way to get other nations to focus on the problem is to threaten concrete action. “I hope the Trump actions will spur them into multilateral action.”

Most economists say it’s not worth risking a trade war where everyone loses from retaliatory responses. Advocates of more protection, however, see it differently. In their view, the US is a longtime victim of its own free-trade policies, having allowed other countries to champion their own manufacturing industries at the expense of American ones.

“I don't see how you avoid some disruption,” Mr. Tonelson says. “The duration of these policy mistakes has disrupted major pieces of the US economy.”

US Trade Representative Robert Lighthizer has also signaled his impatience with the forum on steel. He was with the Reagan administration in the 1980s when it used aggressive trade threats to convince nations to reduce their exports of cars, steel, and other products to the US.

Tonelson is optimistic that, again, nations will see the wisdom of accommodating the US: “Quite frankly, they need us a lot more than we need them. And I think they all know that.”

A changed economy

Yet the global economy has changed dramatically since the 1980s. Back then, the Soviet bloc was not part of the world trading system and China was an economic weakling. Now, as the No. 2 economy and a huge potential market for consumer goods, China has emerged as a rival that other nations may not be so eager to snub. And while the US still has the largest economy, its share of world GDP has slipped from about a third in the mid-1980s to a little better than a fifth today.

Trump trade adviser Peter Navarro has long argued that America’s persistent trade deficits, with imports far outweighing exports, are damaging the economy as other nations retain trade barriers bigger than those in the US.

The administration is also basing its new tariffs on the rationale that heavy industry is vital to national security and is under threat. While many don’t buy the national-security argument, “Most US CEOs I talk with ... Are on balance supportive of a tougher [government] stance toward China,” said a tweet this week from Ian Bremmer, president of the Eurasia Group in Washington, which provides analysis on geopolitical risks.

But business leaders also worry about a budding global pullback from free trade and the economic growth it fuels. It’s a retreat that goes beyond Trump. The new tariffs will impose higher prices on US carmakers, builders, and consumers, even as they anger trade partners and possibly spark a chain reaction of retaliatory moves.

Already, countries including China are implying they may put a squeeze on imports of US soybeans, dairy products, and more.

Katheryn Russ, an economist and former Obama administration adviser, says America should bring cases of trade violations to the WTO, while seeking to build multilateral support for pressure on China. And the US can support its own workers by improving things like education, infrastructure, and the safety net for the unemployed.  

Trump appears to be considering one move that Ms. Russ and others say could help a lot: Rejoining the effort by about a dozen Pacific Rim nations to forge a Trans-Pacific Partnership (TPP), to set trade rules that China might ultimately be drawn into compliance with.

Rather than isolating itself by acting unilaterally, “the US needs help,” says Russ, now at the University of California, Davis. “We’re not big enough by ourselves to effect change in the global steel market.”