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Trump's Knee-Jerk Tariffs Will Have Unintended Consequences

Trump's Knee-Jerk Tariffs Will Have Unintended Consequences

(Bloomberg View) -- It makes sense to ask why the Trump administration was given almost a year to decide whether aluminum and steel imports were threats to national security, yet it took only 90 days for the president to act on that decision. But three months was ample time to peruse or even skim through some of the hundreds of pages on global trade to come to a constructive conclusion. 

Apparently, President Donald Trump couldn’t be bothered. Instead, on March 1, well before the mid-April deadline, he jumped the gun, tossing out a rash and unexpected decision that was even more severe than any of the three aggressive options offered by Commerce Secretary Wilbur Ross.

Although Trump was not bound by the Commerce Department’s recommendations, he chose the most aggressive of three options -- a blanket tariff on all imports of aluminum (7.7 percent) and steel (24 percent). He then made matters worse by upping the ante to 10 percent and 25 percent, respectively. The immediate result was a storm of global discontent. In particular, it appeared the U.S.'s neighbors would be the hardest hurt, as would China, the intended target, though to a significantly lesser extent. So Trump caved a bit, agreeing to give Canada and Mexico reprieve.

Slapping on blanket tariffs could be considered a policy blunder. But it's worse than that, because the move lacks strategy. And it poses significant risks to broad facets of the industrial metals sector and the global economy. 

Since March 1, it’s become clear that trade protections can and will bring retaliatory responses from U.S. trading partners. Such actions would push up costs for domestic manufacturers with steel and aluminum inputs, and ultimately for American consumers, dramatically curtailing investment and hiring and creating net job losses for the nation. The measures would hurt hundreds of sectors to protect two.

The result was multiple politically motivated retaliatory threats against U.S. exports such as bourbon, blue jeans and automobiles. The list is likely to grow to include some of the largest industry contributors to U.S. gross domestic product, such as energy and defense. A steel tariff would create costly complications for oil and gas pipeline operators, which often source specialized materials from outside the U.S.

Sadly, the only industry to benefit would be a dying one -- U.S. metallurgical coal producers. That sector has been eyeing potential moves to stymie steel imports in the hope of increases in domestic demand should an infrastructure plan come to fruition.

Here are some lessons from the trade decision and some crucial policy changes that should be addressed:

  • Revoke or revise Section 232 of the 1962 Trade Expansion Act, which allows the president to impose tariffs without congressional approval (though it’s unlikely such a move would pass in the House). Also, 232 focuses on whether the importation of an article or quantities thereof threatens national security. While it has been invoked only twice previously -- to limit oil imports from Middle East adversaries Libya and Iran -- using it for metals would open the door for a potential avalanche of security-threat cases not only on imports but on international business transactions, too. There was further proof of this only days ago when Trump blocked Broadcom’s $117 bid for Qualcomm for national-security reasons.
  • Block blanket tariffs or quotas. While these measures are intended to combat overproduction in China, that country's products are already subject to U.S. import restrictions.
    Proposed tariffs are likely to have a greater impact on European allies and Asian suppliers like South Korea and Japan with which the U.S. has good trade relations and sizable exports. Additionally, it’s a gift to adversaries such as Russia, which would profit from disputes between the U.S. and Europe, or China and Korea. U.S. sanctions on Iran, Russia and North Korea were enacted for legitimate geopolitical reasons. Tariffs, like sanctions, need to be targeted and purposeful.
  • Respect and uphold the U.S. role in the World Trade Organization. The U.S. was a leading force in establishing the organization in 1995, which now has 135 member nations. Now America is invoking national security to destroy an intricate set of trade agreements that it spent decades putting together. The WTO is the global arbiter of trade disputes and a forum for countries to enforce agreements. The Trump administration is likely to face challenges before the WTO. South Korea is considering filing a complaint if the U.S. levies heavy duties on steel; other nations are likely to follow suit.
    This international trade friction from the tariff decision is occurring even as the U.S. is renegotiating Nafta and two dozen Senate Republicans are urging Trump to re-engage in the Trans-Pacific Partnership. Complaints against the U.S. will make it more difficult in both cases.
  • Pay attention to timing. Without careful consideration, reducing imports will have a negative impact on U.S. metals buyers in the short and medium terms. For the aluminum industry, restarting idled capacity takes about nine months. Then, each smelter needs to start running toward optimal capacity, which also takes time. Realistically, it may take 12 to 15 months to reach optimal production.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shelley Goldberg is an investment adviser and environmental sustainability consultant. She has worked as a commodities strategist for Brevan Howard Asset Management and Roubini Global Economics.

To contact the author of this story: Shelley Goldberg at shelleyrg3@gmail.com.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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