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Section 232: Pentagon Stokes A Burgeoning Trade Conflict – Analysis

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The Trump administration has received qualified support in its quest to raise tariffs on aluminum and steel tariffs from abroad, part of its wider mission to wield protectionist policies in the name of safeguarding “national security.” In a memo to Secretary of Commerce Wilbur Ross on Friday, Defense Secretary Jim Mattis agreed that aluminum and steel imports based on “unfair trading practices” posed a threat to US security, but warned of the “negative impact” on key allies, calling for targeted rather than global tariffs.

While Chinese metals overproduction is a serious issue, Ross’ recommendations to carry out unilateral punitive action runs the risk of severely backfiring: for the sake of scoring political points with a minority of Americans, the proposed solutions would antagonize key trading partners, raise the risks of a trade war, and cause severe – and even irreparable – harm to the domestic economy. It’s a shame that Mattis – normally seen as among the more reasonable members of the administration – didn’t lay out the potential harm of these threats more clearly.

A solution looking for a problem

The government’s ‘Section 232’ investigation into steel and aluminum imports was ostensibly launched to discover whether imports were posing a threat to the domestic economy and defense-industrial base. Ross and his team concluded that this was indeed the case and recommended that the administration take immediate action by imposing quotas or tariffs with the objective of ‘increasing demand for American-made metals’.

Options including applying a global tariff of 24% on steel imports (7.7% on aluminum) or specifically targeting countries supplying steel and aluminum to the US via an elevated tariff level, with additional caps on import quantities. Another approach would be to introduce an import quota for both metals at a fixed percentage of current import levels. President Trump must respond to the reports by mid-April – but he is in no way bound by the recommendations of the DoC.

But a Trump move to levy tariffs will most likely ignite a global trade conflict. China – among others – has already begun to threaten retaliation. The backlash over the administration’s recent imposition of tariffs on solar panel and washing machine has already sparked a quid pro quo response, with the news that Beijing is investigating US sorghum exports (worth around $1.1 billion in 2017) being the latest to worry trade lawyers. Further provocation could easily escalate tensions and lead to sanctions on US soybean exports (worth $14 billion in 2016) or persuade the country to swap its Boeing planes for those produced by Airbus, for instance.

The impact of unilateral and global metal tariffs is also likely to be felt just as deeply by other countries. Canada is currently the top supplier of steel and aluminum to the US, while Brazil, South Korea and Russia also have plenty to lose from the introduction of a more punitive tariff system. The flow of low-carbon metals that are offered by non-Chinese exporters like Norsk Hydro and Rusal would also be severely restricted. Both of these firms rely on their considerable domestic hydropower capacity to produce aluminum with a lower carbon footprint than traditional smelters. If such suppliers are restricted, US firms will have no choice but to turn to higher-emissions suppliers.

Much ado about nothing

It’s key to note that US defense firms use only about 3% of all steel produced in the US, and most imported steel and aluminum comes from close allies with whom the US shares mutual-defense treaties. Citing national security as a way to carry out old-fashioned protectionism thus runs the risk of not only raising the possibility of a global trade conflict but also spoiling relations with some of our closest allies – not exactly a recipe for making America safer.

Raising the economic stakes

US economic experts and domestic interests set to be affected by new tariffs have also warned of the potentially negative impacts. Last week, six pro-free trade groups wrote an open letter to the president saying that the national security case for imposing tariffs is “thin” and that the economic price to be paid would be “considerable.” Many of the signatories include traditionally right-leaning groups such as R Street, the National Taxpayers Union, and FreedomWorks.

Spokespeople representing the domestic aluminum and steel industries have countered that the tariffs would help reduce overcapacity, reset the trade imbalance with China, and revive US aluminum smelters and steel mills. Yet experts are skeptical that domestic industry could increase production enough to make up for the expected drop in imports.

For instance, for certain products such as steel pipes and tubes, the proportion made up by imports is too large for domestic industry to compensate for. Additionally, it is difficult to convert steel mills that specialize in making certain kinds of finished products – such as sheet steel – into another, such as pipelines.

Missing the target

Then, there is the tiny detail that while US firms and non-Chinese suppliers would be slammed by the tariffs, China would suffer only a minor blow: according to the Commerce Department, the country did not even rank among the top 10 sources of American steel imports during the first 3 quarters of 2017.

It’s clear that even the more “targeted” approach recommended by the Defense Department would still miss the mark, resulting in short-lived political gain for long-term geopolitical and economic costs. Though the blowback might not result in a military conflict, the price to pay would still be a hefty one.

* Robert Held is a financial consultant specializing in international finance and transnational tax law, and lives in Geneva, Switzerland.


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