The breakdown of the system: US national security exception for steel

Many will argue that such a statement is overblown.  After all, many governments—including the United States--have used national security arguments in the past to justify a variety of actions.

There are reasons why national security exceptions are explicitly embedded into the global trading system and replicated in all smaller trade agreements.  Governments need to protect their citizens from harm, especially in times of actual war or conflict.

So what differentiates Trump’s movement on steel and aluminum from past national security claims? 

Let’s start with the logic behind the Trump’s decision.  He has used, as Talking Trade has noted in the past, an old domestic law, Section 232, that has rarely been employed. 

In imposing global tariffs of 25 percent (a “nice round number” Trump reportedly said) on steel and 10 percent on aluminum, he has opted for the harshest penalties (with a bit extra) on offer by his own government bureaucrats. 

The justification for 232 is that foreign imports have harmed national security.  However, the US military reportedly argued against the imposition of global tariffs.  In fact, the defense industry in the United States imports relatively modest amounts of either steel or aluminum. 

The primary concern, as expressed by Trump, is overcapacity of steel and aluminum by China which is then dumped in the US market, depressing prices and leading to an uncompetitive market for domestic firms.  As a result, there are limited opportunities for domestic producers to survive in the face of such tough competition.

If there are no US steel or aluminum producers in the long run, there will be national security problems in the future in generating sufficient quantities of these key materials for the creation of tanks, guns, aircraft and the like.

The reality, however, is quite different.  As a result of a blizzard of anti-dumping orders—largely orchestrated by the current USTR Robert Lighthizer—the actual level of Chinese imports into the United States is quite limited.  Instead, most imported steel and aluminum actually comes from US allies, including Canada.

The Trump remedy will therefore hit the entirely wrong targets—Canada and Europe but not China. 

Worse, by using “national security” as the justification for what is basic protectionism, it opens the gates wide open for every other country in the world to do the same. 

While this last statement justifies the opening statement that the world is one step closer to breakdown, what really accelerates the problem is the response of the targeted countries.

It is simply not going to be possible for countries like Canada or Europe to simply sit back on their hands and say, “Well, that’s just Trump being Trump” or “China is also a problem for us, so even though this particular policy change is deeply damaging, we will remain calm and keep trying to work together.”

What happens next?  First, we have already seen the collapse of what was meant to be a cooperative mechanism to address global steel overcapacity.  It may be the case that this system was not working as well as it could have done, but if the United States had no intention of participating in good faith, it was never going to move forward effectively.

Second, the Europeans, Canadians, Brazilians and others will likely retaliate.  This is unprecedented.  Allies do not normally attack one another outside the World Trade Organization (WTO).  But given the US approach to act increasingly outside the global trade system, the EU and others will decide it also cannot afford to wait for the multilateral dispute system to work either.

Third, the Chinese might also respond.  They may respond directly to the United States, triggering the start of the tit-for-tat behavior that many trade analysts have been dreading for a year.  Or, they may respond by redirecting steel and aluminum exports into other markets. 

This risk may be overstated, given the relatively low levels of Chinese exports into the United States now.  If the US market were not saturated with anti-dumping orders on Chinese products, there would be more Chinese products now being hit with 25% steel tariffs or 10% aluminum tariffs. 

The European Union is already discussing the potential for “safeguard” tariffs.  This would help protect European producers from being overwhelmed with newly diverted steel and aluminum products that are suddenly no longer competitive in the American market.

Fourth, other countries will start to use “national security” exceptions to block imports of all sorts.  Here is the real danger of Trump’s policy.  Once the major players in the system start to undermine the key norms of behavior, it opens the door for everyone to misbehave. 

Finally, by imposing such high tariffs on key items in the economy, Trump has successfully raised costs for products across the board inside the United States. 

This may appear to be a problem only for US consumers and firms.  Given the tight integration of supply chains, however, Trump’s tariffs might actually affect global firms and citizens in completely unrelated places.  Parts and components, for example, may become 25% more expensive with no quick or easy solution for replacement in the short run. 

Thus, what at first may seem to be a purely domestic issue—the imposition of tariffs on steel and aluminum against China inside the United States—is going to have global implications.  The world should not view this threat lightly.  The escalation of challenges to the global trade system appears to have begun.