US moves closer to risky trade war without a clear end game
The Trump administration is flexing its protectionist muscles. Earlier this week, it promised to move forward with widespread tariffs against China, and on Thursday came the announcement that Europe, Canada, and Mexico will be hit with expanded levies on steel and aluminum.
It’s a dramatic escalation after what had seemed to be a period of cooling off, when closed-door negotiations had replaced open threats, and Treasury Secretary Steve Mnuchin said a trade war with China was “on hold.”
The latest announcement on metals, made by Commerce Secretary Wilbur Ross, was met with quick promises of retaliation, sparking new concerns about a trade war and sending US and European stock markets sharply lower.
The administration’s tough stance brings a host of new risks — some, but not all, economic. What if a piqued China uses its leverage over North Korea to disrupt plans for a Trump-Kim summit, or Europe opts to defiantly strengthen business ties with Iran?
Which is not to say that Trump’s return to a tariff-first policy is necessarily a bad idea. Tariffs can work, in the right situations. The classic example is Harley Davidson’s resurrection from near-bankruptcy in the 1980s, when a targeted, short-term tariff against imported motorcycles gave that iconic company its chance to rebuild.
But what’s required to make tariffs work is a clear strategy connecting means and ends. And that’s where Trump’s on-again, off-again approach to trade policy seems incomplete.
Start with the steel tariffs. They always had a flimsy official rationale: ensuring an adequate supply of domestic steel for national defense, despite the fact that we produce plenty and get more from our closest allies.
But behind that national security claim is a more basic desire to protect struggling US metal producers from foreign competition. And in that context, Trump’s decision to revoke exemptions for Canada, Mexico, and Europe makes sense. Steel tariffs can reduce imports only if they apply to our biggest importers, and we really do get a lot of our steel from these nations.
There is, of course, a reason these allies were exempted in the first place: They’re our allies, and we rely on them for help with all manner of geopolitical issues, from trade and customs controls to intelligence sharing and the fight against terrorism. Threaten that comity, and you risk a broader breakdown in the relationship — which is where we stand now that the exemption is gone.
With China, the reasoning was different. Over the years, the United States has been justly frustrated by China’s lack of protections for intellectual property and its willingness (tacit or explicit) to support various forms of industrial espionage to extract US business secrets. Trump himself is also passionate about reducing the trade deficit, ensuring that China buys as much stuff from us as we do from them.
By threatening — and moving to implement — new tariffs, the Trump administration seems to be betting it can force China to the negotiating table in a weakened position. Which is not impossible. China’s economy is particularly vulnerable to US trade restrictions, precisely because they send so many products to our shores, products that might otherwise pile up in Shanghai warehouses.
But the collateral damage could be massive. China has previously threatened to respond with matching tariffs against US soybean farmers, chemical manufacturers, and automobile makers. And it could look for other, non-trade-related ways to hit back, including on issues of great import and sensitivity, like the negotiations with North Korea or the longstanding detente over Taiwan.
In the worst case, a trade war could push us closer to what’s sometimes called the Thucydides trap, where rising powers (like China) and ruling powers (like the United States) can’t help but fall into open conflict.
None of these risks even touch the core economic problem that tariffs are generally self-defeating. Yes, you can safeguard domestic metal manufacturers or the occasional motorcycle company, but only by limiting competition and thus driving up prices. Steel makers benefit, in other words, but steel users pay — in the form of higher prices for things like automobiles.
Of course, if the tariffs achieve some broader aim, higher prices might be a justifiable cost. But it’s not clear Trump and his advisers have thought this game through to the end, properly weighing the full set of risks and benefits, economic and diplomatic.
Their mercurial turns — escalate, negotiate, escalate again — suggest otherwise, but there’s always a chance this unpredictability is part of the game.