This Is Not the Trade War You’re Looking For
The chattering class has been itching to assign a trade war to President Trump since he took office. But the steel tariffs aren’t it.
President Trump announced on March 1 that he plans to issue a 25 percent tariff on steel imports as soon as next week, capping off a 10-month process in which the Commerce Department determined these imports pose a threat to national security.
Almost immediately, the announcement was framed as the first shot in a trade war between Trump and the rest of the world.
Because Trump has made revamping America’s trade policies a hallmark of his agenda since his presidential campaign, pundits have been clamoring to push the narrative that any trade enforcement action is a trade war. Lost in the shuffle is any meaningful discussion as to how we got here in the first place, why such trade enforcement is needed, and what the actual, real-life consequences of the potential tariffs are likely to be.
Let’s break things down and bust some myths.
Myth: The steel tariffs will shock the stock market, deter economic growth, and lead to a depression.
Busted: This scary idea took hold on Thursday after the market’s initial reaction to Trump’s announcement. Steel company stocks went up, while the stocks of some companies that are heavy users of steel went down … and everyone jumped immediately to a doomsday scenario.
But the stock market reacts (and frequently overreacts) to a lot of things, some of which are driven more by investor emotion than actual economic factors. Once those emotions calm down, things stabilize. That is almost certain to happen here. In fact, by Friday the markets had already rebounded. NASDAQ and the S&P 500 were both up, while the Dow dropped slightly because McDonald’s was downgraded!
After all, foreign steel is a small piece of overall U.S. economic activity, with imports accounting for just a tenth of one percent of the U.S. economy.
The talking heads also panicked when Trump signed off on tariffs on imports of foreign washing machines and solar panels. But on that same day, the S&P index advanced to a record closing. Meanwhile, Whirlpool — which makes its washing machines in the United States — saw its stock price surge and announced 200 new jobs in Ohio as a result.
As for the whole idea that the steel tariffs will lead to a new depression — there’s been lots of references to the infamous Smoot-Hawley Tariff Act of 1930 — there’s little reason to panic. It’s a nice scare tactic, but Smoot-Hawley included tariff changes that impacted 20,000 categories of goods, and it was enacted by Congress at a time when the economy was nose-diving and the stock market had already crashed. It’s not a reasonable comparison to the current situation today.
Myth: American companies that use steel will see their costs skyrocket.
Busted: Before we tackle this one, let’s take a step back.
Trade enforcement actions take place when American companies are on the brink, unable to compete against foreign governments that heavily subsidize products and dump them into the U.S. market, priced below fair market value. Enforcement is meant to level the field for those American companies, thereby allowing them to stay in business, keep American workers employed, and fairly compete.
In virtually all trade enforcement actions, from honey to tires to furniture to steel, the costs of enforcement outweigh the costs of doing nothing.
Regardless, pundits love to push the idea that tariffs lead to significant cost increases, and frequently cite President George W. Bush’s issuing tariffs on steel in 2002 as proof. But nothing of the sort happened.
Instead, the International Trade Commission found there were no discernible economy-wide effects, and the tariffs may have even resulted in an overall welfare gain of 0.0006 percent of GDP.
Prices for steel in the U.S. market fell relative to prices in foreign markets. In some cases, prices for steel products declined, and 71 percent reported no changes in their steel supply contracts. In fact, steel-consuming industries reported an increase in overall sales and profits the year following the tariffs.
Companies that buy foreign steel to make another product aren’t likely to see monumental price increases. And it’s important to remember that cheap, foreign steel comes at a cost.
By the way, the tariffs did help the steel industry. More than 30 steel companies had gone bankrupt prior to the tariffs. The remaining industry was able to consolidate, modernize, and become globally competitive. It clawed back market share, only to be shocked again when China’s state-sponsored industry came online as a global steel producer later in the decade.
Myth: This is going to lead to cost increases on everything from cars to beer.
Busted: Yet another talking point that isn’t based in fact.
For example, the chattering class jumped on a statement from Toyota that the tariffs would cause auto companies to “substantially raise costs.” What got far less attention was a statement from General Motors that argued “the bottom line is we support trade policies that enable U.S. manufacturers to win and grow jobs in the U.S…. Over the last several years, we have shown we are a disciplined company with the ability to adjust and adapt to a variety of market challenges.”
A little bit of a different take, eh? But since it is one that doesn’t fit nicely into the trade war narrative, it didn’t get a ton of play.
Meanwhile, MillerCoors complained that a similar 10 percent tariff on aluminum will lead to the cost of beer skyrocketing. But it only costs brewers a dime for cans and 5 cents for aluminum; any price increase impact on consumers will be minimal, and it’s entirely up to the companies themselves whether to pass that cost along.
Several times over the past decade, commodity prices for steel and aluminum have plunged, yet there is no evidence that companies like MillerCoors or Toyota passed along those savings to consumers.
Myth: Steel imports don’t impact national security, so Trump’s argument is void.
Busted: It’s been surprising to see how quickly pundits have dismissed the fact that steel is essential to our national security; they’ve been so focused on the idea of a trade war that they’ve forgotten we need steel should we get into an actual war.
The ability to make steel is essential to our national defense. The military needs steel to build everything from tanks and battleships and submarines, and we need it for critical infrastructure like bridges and the electric grid. But surging imports have caused dozens of steel factory closures; there’s now just one American company left, for instance, that can make the steel needed for Virginia-class submarines, and only one that makes the type of steel used in the electric grid.
You can’t build a steel plant in an emergency; you rely on it to be at the ready. Our national security depends on the domestic industry’s ability to manufacture steel from start to finish in America.
As one retired U.S. Army brigadier general told the Commerce Department:
“It is a myth that steel will always be available for U.S. defense requirements. Domestic steel makers’ health depends on the health of their commercial sectors…If the commercial market is disrupted, the defense production sector cannot survive.”
Myth: This is a trade war!
Busted: O.K., let’s get down to business.
The day after Trump announced the steel tariffs, a European Union official pledged to issue tariffs on quintessential American products like Harley-Davidson motorcycles, Kentucky-made bourbon and blue jeans. This might have helped drive that trade war narrative, but it was obviously just a P.R. stunt, driven more by politics than actual economic concerns (the vast majority of denim is made outside of the United States, after all).
In reality, trade enforcement actions are very common, and both our allies and strategic competitors adjust to them. There were 82 major antidumping and countervailing duty cases started in 2017, according to the White House. The Commerce Department currently oversees 411 duty orders spanning more than 40 nations.
When trade disagreements happen, rather than result in a tit-for-tat trade war, they typically head to the World Trade Organization (WTO). The United States is on firm ground when it comes to issuing tariffs in this case, because the WTO specifically allows limiting imports on national security grounds.
And the United States has a solid track record of taking on these actions at the WTO. Of the 25 cases filed by the Obama administration, the United States won 14, settled six others favorably, and five were still in litigation when former President Barack Obama left office.
Don’t fear a “trade war.” These tariffs are a trade enforcement action, designed to defend America’s steel industry against foreign threats and safeguard our national security. And it sure beats continuing a trade surrender, which has damaged our workers for far too long.
And one last thing: Since these tariffs have been announced, we’ve seen plans to add nearly 3,000 jobs back to the steel and aluminum industries, in places like Ohio, Illinois, Florida, Kentucky and Missouri. No, this is not the trade war you’re looking for.