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  March 7th, 2018 | Written by

Donald Trump, Steel Tariffs, and the Costs of Chaos

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  • Trump’s tariff decision will have huge consequences for the global trading order.
  • Trump’s announcement of steel and aluminum tariffs followed a morning of chaos in the White House.
  • The problems in the steel and aluminum industries are real.

When President Nixon announced on August 15, 1971 that the United States would impose a 10-percent across-the-board tariff on imports—the most significant import restrictions since the 1930s—it followed an intense weekend of deliberations among his top officials at Camp David. Nixon’s economic brain trust spent three days carefully hammering out the details of the import restraints, and then signaled to the world that the president was prepared to lift them as soon as US trading partners allowed their currencies to rise. The tariffs were removed four months later after a negotiated agreement.

When President Trump announced March 1, 2018 that the United States would impose 25-percent tariffs on imported steel and 10-percent tariffs on aluminum—the most significant import restrictions since 1971—it followed a morning of sheer chaos in the White House. The administration had announced the night before that leading steel and aluminum makers were invited to the White House, leading to speculation that new tariffs would be announced. But in the morning White House officials backed off, with the press office saying instead that it would only be a “listening session.” And then, with the cameras rolling and his own staff apparently unprepared, President Trump announced that the tariffs would be unveiled next week and would be kept in place “for a long period of time.”

It was once said that Britain lost its empire in a fit of absent-mindedness; the United States, it now appears, could lose its own in a fit of Donald Trump’s impulsiveness.

The precise contours of the new measures are still unknown. The administration may exempt still large suppliers like Canada and Brazil, and may exclude some products, though Trump told industry officials he does not want exemptions. There will be frenetic lobbying between now and the final announcement. And the negative market reaction—the Dow Jones fell about 600 points after the announcement—could stay the president’s hand.

But the issue is not simply the economic consequences. The president’s announcement yesterday was the clearest and most disturbing sign yet that he is quite prepared to take ill-considered actions that will chip away at the foundations of the global trading system.

The problems in the steel and aluminum industries are real—global overcapacity caused primarily by Chinese state subsidies to their producers. But the proposed measures are wildly indiscriminate, and will hit many countries, among them the closest US allies and others that have played by the rules of the trading system.

The new tariffs rely on a provision of law—Section 232 of the Trade Expansion Act of 1962 which allows imports to be blocked on national security grounds—that has not been used successfully in decades. Previous administrations had interpreted the provision narrowly, requiring evidence that the military needs of the Pentagon could not be supplied by US production or by close allies like Canada. Trump’s Commerce Department threw away a half century of precedent in finding that steel imports, including from the most-trusted US allies, had caused “a weakening of our internal economy [that] may impair national security.”

Under current global trade rules, the United States will get away with it. Article XXI of the World Trade Organization (WTO) agreements states that countries are free to take actions they deem essential to their security interests. But WTO members have been cautious not to abuse that provision, recognizing the obvious danger. Now the United States—a country that has long championed the WTO system—will blow a giant loophole in the rules that other countries will eagerly walk through. China, India, Brazil and others are more than capable of inventing similar national security rationales for restricting imports.

The most encouraging thing that can be said is that, as the great Yogi Berra once put it, “it ain’t over till it’s over.” The president’s impromptu announcement will generate a huge pushback. The potential losses for the big steel-using manufacturers—including the Big Three auto companies, construction equipment firms like Caterpillar and John Deere and the construction sector more broadly—will have them all beating a path to the White House and Congress.

Trump’s more conventionally-minded aides, like National Economic Advisor Gary Cohn, may succeed in watering down the measures. The Pentagon has also warned about the “negative impact on our key allies.” Foreign governments, including the European Union and China, have said they will retaliate and target US exporters. EU Commission President Jean-Claude Juncker called the measure “blatant intervention to protect US domestic industry and not based on any national security justification.”  Important Trump allies in Congress are in revolt—Senate Finance Committee Chairman Orrin Hatch (R-UT) called the tariffs “a tax hike the American people don’t need and can’t afford.”

But even if the measures finally unveiled are more limited, great damage is being done. The United States built the architecture of the global economy in its image. The WTO was largely a US creation. Now Donald Trump, in a fit of impulsiveness, may tear it all down.