Donald Trump’s scepticism about free trade is longstanding and was a prominent feature of his 2016 presidential campaign. Such was the appeal of Mr Trump’s protectionist stance that his opponent and former free trade advocate Hillary Clinton found herself renouncing the Trans-Pacific Partnership she had once promoted.
The recent imposition of tariffs on imports of metals is Mr Trump’s latest attempt to deliver on campaign promises to shrink America’s trade deficit and ‘bring home’ manufacturing jobs. The US will impose import taxes of 25% on steel and 10% on aluminium. Mexico and Canada are exempt, a move which seems designed to strengthen America’s hand in the current negotiations over the future of the North America Free Trade Agreement (NAFTA).
The tariffs are ostensibly aimed at China, which the US administration believes is dumping excess steel and breaking World Trade Organisation (WTO) rules. But the US has invoked a different rationale for the imposition of tariffs, the little-used Article XXI of the WTO treaty, which allows tariffs to be imposed to protect national security. This rationale is questionable given that the tariffs will principally affect imports from allies including the EU and Japan, who are major exporters of steel to the US.
All this falls short of an all-out trade war. In macroeconomic terms the tariffs are relatively trivial, accounting for 2% of last year’s US imports, or 0.2% of US GDP. Recent US history demonstrates that the imposition of tariffs does not lead inevitably to a trade war. Every US president since Jimmy Carter has imposed some form of trade barrier to try to protect jobs. In the 1980s President Reagan negotiated so-called voluntary export restraints with Japan to limit imports of steel and cars. George W. Bush implemented a 30% tariff on steel imports in 2002. These measures did not cause a spiral of retaliation or much disrupt the world trade order.
Three factors suggest that the risks are greater this time.
First, Article XXI of the WTO Treaty allows a nation to override the normal rules of the WTO by invoking national security, even when there is no evidence that exports are subsiding, sold below cost, or are surging. As The Economist has observed, “By appealing to national security, rather than making a case of the sort the court normally rules on, Mr Trump is blocking the mechanism that sanctions limited retaliation and thus stops trade wars blowing up”.
Second, previous administrations have applied tariffs, but they were initiated by presidents who were committed to free trade and the rules-based system that underpins it. Mr Trump’s position is quite different. In rhetoric at least he would count as the most protectionist US president since the 1930s. The risk is that US tariffs cause a tit-for-tat spiral of protectionism. The EU has said it will impose tariffs on a number of US products, including Bourbon, blue jeans and Harley Davidson, if the tariffs are not revoked.
Third, US grievances towards China are not without substance. The EU also believes that China is dumping excess steel on world markets and last August imposed provisional anti-dumping duties on Chinese steel. Nor is this just about steel. Given the scale and competitiveness of America’s tech sector, and its success in other major markets, it is perhaps surprising that the US scarcely runs a trade surplus in intellectual property (IP) with China. It is not only members of the Trump administration who believe that Chinese trade barriers have been a factor here. A report from the National Bureau of Asian Research put the annual cost of intellectual property theft to the US economy at $225-600 billion with China labelled “the world’s principal IP infringer”. The fact that the Chinese government has set targets for the share of its market that must be served by Chinese companies in rising industries, including supercomputers, autonomous vehicles and advanced medical devices, sits uneasily with a commitment to free trade. This week The Economist’s cover story entitled, ‘The Battle for Digital Supremacy’, provides a gripping account of the contest between the US and China.
Yet if China is the target, Mr Trump’s steel and aluminium tariffs are not the solution. China accounts for just 1% of US steel imports. As for US manufacturing, the supposed beneficiary of higher tariffs, it may well end up losing jobs. A Wall Street Journal survey of economists last week showed that most expected job gains in the steel and aluminium industries are to be more than offset by job losses in sectors that will have to pay more for imported steel and aluminium. This would be consistent with the effects of steel tariffs imposed by President George W. Bush in the early 2000s. The Trade Partnership, a US consulting firm, estimated that those tariffs led to almost 200,000 job losses in industries that rely on steel as prices rose. This is more than the entire workforce of 187,500 people employed in the steel sector at the time.
Whatever happens to the sector, the overall economic effects of the current trade measures will be small. Steel manufacturing today accounts for 85,000 jobs in a labour market of 192 million people. In the last 12 months the US economy has, on average, taken just 14 days to create 85,000 jobs.
Reflecting on the likely impact of tariffs on US jobs and their failure to address supposed Chinese trade infractions, it is hard not to conclude that Mr Trump’s low approval ratings and the looming mid-term elections in November may have played a role in their adoption.
On trade the real economic question is what happens next. The two events to watch for are the negotiations between the US, Canada and Mexico on NAFTA and the conclusions of a US investigation into China’s policies on intellectual property (IP).
Forthcoming US and Mexican elections mean that the negotiators have an incentive to reach an agreement in principle in the next couple of months. NAFTA seems likely to survive in an amended form, though this is by no means certain.
Things are moving on the US investigation into China’s approach to IP. Last week the Politico news site reported that Mr Trump wants, “to hit China soon with steep tariffs and investment restrictions in response to allegations of intellectual property theft”. These sorts of measures are likely to be on a greater scale than the tariffs on steel and aluminium, and more consequential.
Trade tensions between China and the US could be seen as inevitable as one super power adjusts to the rise of another. It is true that in the 1980s the US was engaged in an economic competition with the rising super power of the time, Japan. But Japan was a strategic ally. China is not. Today the US is locked in an economic and a strategic competition with China. For all the talks of bringing back jobs and protecting the steel industry, a more aggressive US approach to trade is part of a far wider geopolitical contest.
PS: In last week’s Spring Statement the UK Treasury announced a review on the future use of cash, leading to speculation that £50 notes and copper coins could be for the chop. After a brief campaign by the tabloids to “save the penny” the Prime Minister backtracked saying that the future of copper coins is secure. The rise in digital transactions and decline in the use of cash have got many central banks thinking about moving towards more digital currencies. Sweden’s Riksbank has floated the idea of introducing a digital-only currency, but the Bank for International Settlements has cautioned against this, saying it could allow swift and devastating “digital runs” on a central bank. In our recent briefing on the use of cash we noted the continued importance of physical money, and the vulnerabilities of relying on wholly digital currencies such as Bitcoin. This week Google followed Facebook’s lead in banning cryptocurrency adverts as part of a wider effort to protect users from fraudulent ads.
PPS: Our recent briefing on the UK consumer suggested that there is growing evidence that the labour market is tightening. The ONS Labour Market Flows data provide useful, and little noticed, clues as to the state of the UK jobs market. The latest data show that on a trend basis the number of people resigning from one job to move to another is at its highest level since 2001. Lower unemployment and a rising number of job vacancies seem to have emboldened people to change jobs.
Follow us on Telegram
Stay updated of all the news
EUR/USD stays below 1.0900 as Q1 comes to an end
EUR/USD has lost its traction and declined below 1.0900 in the American session on Friday. Quarter-end flows seem to be allowing the US Dollar find some demand but the risk-positive market environment seems to be limiting the pair's downside ahead of the weekend.
GBP/USD trades below 1.2400, looks to post weekly gains
GBP/USD has edged lower after having tested 1.2400 earlier in the day but remains on track to end the third straight week in positive territory. The upbeat mood remains intact after soft PCE inflation data from the US, making it difficult for the US Dollar to continue to gather strength.
Gold tries to stabilize near $1,980 following earlier spike
Gold price has returned to the $1,980 area following a spike above $1,987 with the initial reaction to lower-than-expected PCE inflation figures from the US. Meanwhile, the benchmark 10-year US Treasury bond yield stays in the red near 3.5%, providing support to XAU/USD.
Will Dogecoin price pull an XRP and rally 60% next week?
Dogecoin price has been in a tight range bound movement since November 22. The recent recovery above the range low looks promising and hints at an explosive move for next week.
Week ahead – Nonfarm payrolls to set the tone for US dollar
With the banking turmoil receding, market participants will turn their attention back to economic releases. The spotlight will fall on the US employment report.