Trump’s tactics on tariffs
US president’s plans for steel and aluminium duties cannot be classed as smart or sensible
Could there be some far-sighted political justification for President Donald Trump’s proposed steel and aluminium tariffs? Could it be that whatever immediate economic harm the measures will do, they could serve to boost the credibility of the overall trading system and Americans’ faith in it? The obvious answer, “no”, is the correct one. But it may be worth looking at how similar actions have been used in less-than-catastrophic ways in the past.
The ostensible economic justification for trade defence instruments is to counter unfair actions by foreign exporters or by governments, or to prevent disruptions to markets by cushioning domestic producers from the immediate shock of a sudden flood of imports.
Their often unspoken function is as a political pressure relief valve, to give companies and workers the impression that even binding international agreements can be mitigated in the light of pressing circumstance. Thus, so the argument goes, they can help keep markets open by furthering political legitimacy for the system.
Alan Wolff, now the deputy director-general of the World Trade Organization and formerly a well-known Washington trade lawyer, always used to compare trade defence to putting a seatbelt in a car: it might restrict your immediate freedom of movement but makes it safer to move forward quickly.
This theory has some validity, though with fairly serious drawbacks. One is the threat that the pressure valve is put at such a sensitive setting that it stops the engine running at all. There were many reasons that the Doha round of multilateral trade talks collapsed in 2008, but the final trigger was a row over a special safeguard mechanism for agricultural products in developing countries.
Farm exporters complained that the SSM, unsurprisingly pushed by India, the habitual agricultural protectionist, was so easy to use that it would have left them facing less, rather than more, market access overall. Another is that if the use of trade defence instruments violate WTO law, they undermine rather than advance the wider cause of rules-based trade.
Still, there are some examples inside and outside the US where the discretionary use of trade defence instruments may have served useful political ends. Barack Obama’s tyre tariffs against China in 2009, a “Section 421” action based on provisions in China’s accession agreement to the WTO, had a very weak economic justification. They ending up wasting money and saving few jobs. But they were WTO-legal, did not in fact open the floodgates to a succession of similar actions and may have been useful in buying labour union backing for the Obama administration’s plans for healthcare reform. Broader health coverage, by reducing reliance on employer-supplied plans and hence cutting the catastrophic cost of job losses, probably helped build support for globalisation at the margin.
In 2005, the expiry of global textile quotas under the Multi Fibre Arrangement came at a time when the Chinese labour-cost arbitrage export machine was in overdrive, leading to a surge of garment imports into advanced economies. The US and EU cited a textile-specific safeguard written into China’s WTO accession agreement, and concluded deals to slow the flood. In the EU, the resulting spat between garment retailers and domestic European manufacturers was dubbed the “bra wars”. It was politically embarrassing for the European Commission, which had not seen the issue coming. And yet, ultimately, after transitional agreements were signed, the flow of Chinese garments resumed and the welcome move towards a freer global clothing market ushered in by the end of the MFA continued.
The George W Bush steel safeguards of 2002, involving tariffs of 30 per cent on some products, are far harder to justify. Bush administration officials argue that they at least won enough confidence on Capitol Hill to get trade promotion authority granted to the White House, enabling the administration to go out and negotiate bilaterals. Sceptics regard a temporary ploy to win the midterm elections by buying support in the midwest rust-belt states as a more likely explanation.
The decision was taken in the cynical knowledge that the WTO would likely rule the safeguards illegal after they had done their job. Certainly, the political tension and conflict that the tariffs injected into the world trading system, with the EU and other countries preparing retaliation, makes it extremely hard to imagine that the net effect on the atmosphere for trade liberalisation was positive.
The Trump tariffs, as they have been announced, have none of the redeeming features of the above episodes. They are broad-brush: even the Bush steel tariffs exempted Canada and Mexico. They may or may not be WTO-legal, but in any case they certainly do not rely on a tightly written measure designed for that purpose. Rather, they seek to exploit a vague national security exemption that could serve as an excuse for widespread protectionism. And far from a tactical concession to build confidence in trade, they are part of a full-on assault on its functioning that is likely to poison the atmosphere throughout global system.
History suggests there can be tactically sensible uses of discretionary trade defence instruments. Mr Trump’s proposed tariffs are not among them.