The economics of international trade are notoriously tricky. The World Trade Organization was formed for the express purpose of getting countries to play nicely when it comes to the often dangerous and always intricate matters of global trade.
But President Donald Trump, evidently, doesn't want to play anymore.
With a few comments in late February 2018, a couple of follow-up tweets and some quick comments to reporters on March 5, 2018, Trump has fired the first shot in what many — across the U.S. political spectrum and around the globe — fear could become a full-fledged trade war.
What that could mean, those most fearful say, is a worldwide tit-for-tat on trade that may lead to the loss of thousands of American jobs and — hold on to your wallets — a coming recession.
All that because the president, citing an $800 billion trade imbalance, threatened a 10 percent tariff on aluminum and a 25 percent tariff on steel coming from other countries into the United States.
"This is a terrible idea for the United States. It's something that will be harmful to the U.S. economy," Bryan Riley, the director of the Washington-based National Taxpayers Union's Free Trade Initiative, says.
To slam this in reverse for just a second, let's explain exactly what a tariff is. It's a tax, basically, levied on products coming into a country — imports. So if Trump's aluminum/steel tariffs are enacted, and a U.S. company wants to buy $1 million worth of steel from, let's just say, China, it would cost that U.S. company $1.25 million with a Trump tariff. The extra $250,000 goes to the tax man.
The idea is that, instead of paying that extra $250,000 tax, U.S. companies in need of steel or aluminum will buy from U.S. manufacturers, boosting those hard-hit industries, which in turn will hire more workers to keep up with the increased demand. Everybody in all those Rust Belt states will be happy. The Chinese, maybe not.
But, again, none of this happens in a vacuum. Despite the president's declarations to the contrary, it gets complicated.
The Ripple Effects
The first thing that could happen, sticking with the aluminum/steel example, is that consumer prices will go up on everything that contains steel or aluminum (cars, washing machines, beer cans). That's because the cost for making those goods will go up. U.S. companies aren't going to eat the extra $250,000 cost of buying non-American steel. Consumers of the products will.
Those price hikes on products made with more expensive steel and aluminum will take more money out of consumers' wallets, which means they'll have less to spend. Other American companies will suffer, too, which may cause a pullback in those industries, costing Americans jobs.
Though the tariffs may be designed to help some industries, the nature of trade means they could hurt others. Even in the U.S. "What trade does, in the aggregate, it expands production, it expands jobs, it lowers prices. It benefits countries in the aggregate. But it has distributional impacts," Charles Hankla, a professor of comparative and international relations at Georgia State University in Atlanta, says. Recently, he explains, steel and aluminum have been the industries hurt by trade, but the industries that use steel and aluminum — car manufacturers, washing machine builders, etc.— have benefited because the prices of steel and aluminum have gone down.
And that's another part of the equation. "There are many, many more U.S. workers that are employed in industries that use steel or use aluminum than there are in our aluminum- and steel-producing industries," Riley says. So these tariffs are benefitting one industry but hurting more.
U.S. presidents normally can't impose tariffs without first going through the U.S. International Trade Commission. But President Trump is employing a rarely used provision in a trade act that allows him to lay down tariffs, unilaterally, in matters of "national security," despite a Department of Defense memo stating it has all "the steel or aluminum necessary to meet national defense requirements."
Whatever the method used to slap on tariffs, Trump seems bent on doing it. Canada, a staunch ally, is the biggest exporter of steel to the United States. Tariffs, if they are enacted, will hit Canadians hard. And Trump has said no country will be exempt.
"I don't think that we can feel confident that there were no politics entered into during the decision-making process," Hankla says.
Still, this is not a popular proposition domestically, either, even among Trump's own party. "We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan," House Speaker Paul Ryan, a Republican, said through a spokesperson on March 6. Republican Senator Lindsey Graham of South Carolina echoed similar sentiments the day before on CBS News' "Face the Nation." "You're punishing the American consumer and our allies. You're making a huge mistake here. Go after China, not the rest of the world," he said.
Graham also said the new tariffs would actually be a win for China, not a punishment. China is the biggest source of global oversupply of steel and aluminum, but it exports very little of that to the U.S. because of already-imposed tariffs, including more than 160 antidumping duties.
"The issue here is, President Trump has shown that maybe he's not so concerned about international trade law, or the international trading system, or the legitimacy of the WTO or any of that," Hankla says, "so this could actually lead to a trade war this time."
Countries Strike Back
Many economists expect other countries will retaliate with tariffs on U.S. goods that are totally unrelated to steel or aluminum — the "war" begins — causing a downturn for American businesses who export their goods and services. The European Union, Canada and China have already threatened their own tariffs on purely American products like Harley-Davidson motorcycles, Levi's and bourbon. The Chinese — many believe this whole exercise is a shot at the Chinese, who make up the bulk of America's trade deficit — could also threaten tariffs on American imports like civilian aircraft (Boeing could suffer mightily), soybeans and semiconductors. That could cost more jobs.
Maybe forgotten in all this mess is that tariffs already are a fact of international trading. The WTO provides a forum for virtually all countries (it has 164 members) to hammer out trade agreements. It started just after World War II with the General Agreement on Tariffs and Trade, and implements and monitors trade agreements, too — all of which include what could be described as "tariffs" or "trade barriers" or "taxes," negotiated by all parties.
Other agreements — like NAFTA, the North American Free Trade Agreement, which has the U.S., Canada and Mexico as members — can be struck among nations, too. But, again, those are deals that have to be agreed upon by all parties.
Previous Trade Wars
Trade wars have happened before, often with disastrous results. President Barack Obama laid a 35 percent tariff on Chinese tires in 2009. The Chinese fired back and, according to some, it resulted in higher tire prices for Americans and a loss of some 3,000 American jobs. President George W. Bush imposed a 30 percent steel tariff in 2002, plus 15 percent tariffs on other products harming the industry. A 2003 study determined they cost 200,000 American jobs representing $4 billion in lost wages.
Some point to even worse results. The Smoot-Hawley Tariff Act — which increased nearly 900 American tariffs — was integral, some say, in triggering the Great Depression of 1929.
The point is, even for someone who wrote (or at least served as the title character in) "Trump: The Art of the Deal," this tariff thing, if it's to happen, may not go as planned. And it could go much, much worse.