Trucks wait in line as shipping containers stand in a terminal at the Yangshan Deep Water Port in Shanghai, China, on Friday, March 23, 2018. The trade conflict between China and the U.S. escalated, with Beijing announcing its first retaliation against metals levies hours after President Donald Trump outlined fresh tariffs on $50 billion of Chinese imports and pledged there’s more on the way. Photographer: Qilai Shen/Bloomberg

Trump's Tariff Assault Risks Sideswiping His Strongest Allies

(Bloomberg) -- President Donald Trump has reserved his sharpest criticism on trade for China. Now some of America’s closest allies are getting swept up in the feud.

The Trump administration on Friday will impose a 25 percent duty on steel and 10 percent levy on aluminum from the European Union, Canada and Mexico, after refusing their calls for permanent exemptions. The U.S. says the tariffs are needed to protect domestic industry and national security.

The EU and Mexico responded with plans for retaliatory tariffs on everything from Harley-Davidson motorbikes to American cheese, while Canada said it will slap duties on $12.8 billion worth of U.S. steel, aluminum and other exports.

On the campaign trail, Trump repeatedly accused China of trading unfairly and contributing to the hollowing out of America’s manufacturing sector. And the president may still follow through on threats to levy tariffs directly aimed at Chinese goods. But for now, he has chosen sweeping metals tariffs that are opening a separate front of trade tension with traditional allies.

‘Bad News’

“This is bad news to anybody who cares about the trans-Atlantic alliance,” said Bart Oosterveld, director of the global business and economics program at the Atlantic Council in Washington. “The idea that America’s closest allies represent a threat to its national security is absurd.”

Read more: What is the security basis for the tariffs?

It will be harder for the U.S. to recruit European countries and allies to push back against China, said Oosterveld. Commerce Secretary Wilbur Ross is scheduled to visit Beijing from June 2-4 for the third round of trade talks with Chinese officials amid an ongoing tariff spat.

“It plays into the hands of Beijing,” said Oosterveld. “Why would the EU be interested in tackling Chinese trade practices with the U.S. when Europe is being threatened with tariffs?"

The steel decision will sharpen the tone of talks between Group of Seven finance ministers and central bankers this week in Whistler, Canada. The International Monetary Fund has warned that a global trade war could undermine the broadest global upswing in years. The Fund on Thursday said the timing for rising tensions is unfortunate because trade is boosting the global recovery.

American allies have argued they should be exempt from the tariffs aimed mainly at China, which is largely blamed for flooding the market with cheap products and pushing down global prices.

China was hit by the U.S. steel and aluminum tariffs when they were initially implemented in March, prompting it to slap import duties on $3 billion of U.S. goods.

Nafta Blow

The metals duties deal a blow to negotiations with Mexico and Canada on a new North American Free Trade Agreement. Trump offered to permanently exempt the two countries if they agreed to a revised Nafta to his liking. With the steel tariffs in effect, Canada and Mexico will be less willing to bend on Nafta, said Todd Tucker, a trade expert at the Roosevelt Institute in Washington.

“This really poisons the talks on Nafta 2.0,” said Tucker. “Already, it was difficult to negotiate with Trump, given his unpopularity in Canada and Mexico.”

Trade Cases

In the longer term, the U.S. likely faces months and possibly years of litigation at the World Trade Organization. While WTO rules allow member countries to put in place trade measures that protect their “essential security,” the EU and Canada have pledged to challenge the U.S. actions at the international trade tribunal.

“You could have a dozen WTO cases going in every direction,” Tucker said, adding that importers of steel and aluminum based in the U.S. will probably file lawsuits of their own challenging the validity of the tariffs.

To be sure, the direct economic impact of the tariffs “should be easily manageable, given the size of the affected trade flows,” analysts at Oxford Economics wrote in a research note. “However, the specter of an escalation is likely to weigh on business sentiment and may derail the investment recovery.”

It doesn’t make sense for the U.S. to pick a fight with “countries that have been our best allies and security partners over the past 70 years,” said Rufus Yerxa, president of the National Foreign Trade Council, which represents companies that support a “rules-based world economy.”

“There is a flawed assumption in all of this -- that somehow economic nationalism will lead to this huge economic resurgence,” he said. “History is littered with examples of just how wrong that notion has been.”

©2018 Bloomberg L.P.