The trade conflict widens: Drawing in the EU, Canada and Mexico

Now every country (except Australia, Argentina, Brazil and South Korea) is paying higher duties on these products when shipping to the United States.

US National Economic Advisor Larry Kudlow has argued that the tariffs are simply a matter of a “family quarrel.”  There are at least four reasons why this is not just a minor issue.

Kudlow has said that tariffs with Canada “may go on for a while or they may not.”  For the firms that are suddenly paying significantly higher prices for imported steel and aluminum, it probably doesn’t much feel like a small argument.  A 25% price hike overnight is sufficient to drive firms out of business entirely.  Finding new sources of supply takes time, effort and increased business costs. 

The costs of disruption to existing business models is always high.  This particular disruption was delivered directly by government policy.  It should serve as a wake-up call and a reminder to firms that government decision making is critically important.  It can dramatically alter business conditions in an instant.

For many economists and others, the overall economic costs of steel and aluminum tariffs is relatively modest.  This, however, ignores some important spillover issues.

First, of course, is the direct impact on many firms—especially smaller firms that could literally be unable to survive even a short course of 25% tariff hikes.  Even if the overall numbers are modest, for the firms and individuals caught in the middle, it matters.

Second, the tariff increases by the United States are not simply a one-way event.  Immediately after the US announcement, the Mexican government declared it would begin imposing tariff rate hikes of its own on US exports to Mexico. 

The Mexican Ambassador to the US, Geronimo Gutierrez, said that Mexico would impose a dollar-for-dollar tariff on US goods.  Mexico’s list of products included not just steel and pipe products, but also a range of agricultural items like pork, cheese, and apples. 

The Canadians promised to impose tariffs on $16.6 billion on more than 100 products, starting on July 1, after a two-week comment period.  

The European Union had already announced a long list of products at risk in a trade war back in March when the US first floated Section 232.  The EU covered $7.5 billion including steel, agricultural and a range of very specific items, and nearly half that could be in place as soon as June 20.  Even the Financial Times editorial page argued the EU had no choice but to retaliate.

The retaliation by key trading partners like the EU, Canada, and Mexico both imposes higher costs and damage to firms in steel and aluminum sectors and hits companies that had nothing whatsoever to do with the original problem.  Farmers growing grapes will suddenly find their own markets disappearing overseas and may not even realize their problems are directly related to a Section 232 case over steel.

It is not only the Europeans or NAFTA countries that are irritated (to put it mildly) with the United States.  This weekend, the G7 nations issued an astonishing statement.  The finance ministers asked US Treasury Secretary Mnuchin to convey their “unanimous concern and disappointment” about the tariffs to President Trump.  

The third point of damage ignored by economists is movement of Section 232 tariffs to the World Trade Organization (WTO).  Five cases have either been filed, or are planned, as a result of the tariff policies of the United States, including by the EU against the US, another by Mexico and India, China and Russia have started consultations with the Americans.

But perhaps the most significant problem discounted by economists related to Section 232 is the use of “national security” as the excuse for protectionism.  The steel and aluminum tariffs are not the only use of this tool.  US President Trump has already asked his Commerce Department to extend Section 232 to autos.  (The public comment period is underway inside the US now—please submit your feedback asap.) 

Once the largest player in the system has used the “national security” exception for what are clearly not national security issues, the door is opened for every other country in the system to do the same.  Breaking this key element of the global regime highlights the extraordinarily destructive power of undermining the system by the United States. 

Finally, the imposition of tariffs on key trading partners also aggravates the larger dispute between the United States and China.  At the same time that the Trump administration expanded the Section 232 tariffs for steel and aluminum to allies, it also declared it would impose the $50 billion in tariffs under the Section 301 case. 

Over the weekend, US Commerce Secretary Wilbur Ross traveled to Beijing to try to work out a potential solution to the bilateral disagreement.  While he was expected to come back with concrete plans for increased Chinese purchases of energy and agricultural items, he arrived in Washington empty handed. 

The Chinese tied the two points together in a statement that read: “If the United States introduces trade measures, including an increase of tariffs, all the economic and trade outcomes negotiated by the two parties will not take effect."

Hence, while an initial look at the Section 232 tariffs on steel and aluminum might look relatively modest, this is not just a "family quarrel" but something much more damaging.  It may have started small, but the fall out continues to spread.