Donald Trump imposes levies on metal imports

09.03.2018
WHAT next for world trade? That is the question governments worldwide are asking after President Donald Trump, flanked by gleeful workers, imposed tariffs of 10% and 25% on imports of steel and aluminium respectively on March 8th. The two industries are small enough that, taken alone, Mr Trump’s new policy, though extraordinary, is unlikely much to dent America’s strong economy. But the president has lobbed a grenade towards the rules-based order governing international trade. If, as some fear, a trade war now ensues, the consequences for the world could be profound (see cover leader and briefing).
 
The move had been expected ever since Mr Trump let slip on March 1st that tariffs were coming. Some had hoped that last minute entreaties would cause the president to have a change of heart, as they did when he supposedly came close to withdrawing from the North American Free Trade Agreement (NAFTA) in April 2017. Almost half the Republicans in the House of Representatives penned a letter opposing the tariffs, warning Mr Trump that he was putting at risk the progress he had achieved by cutting taxes in December. The president, who has decried America’s trade policy for decades, and promised protectionism on the campaign trail, was apparently unmoved. Perhaps that is because Peter Navarro, a maverick economics professor and trade sceptic (see profile), is in the ascendancy in the White House. He may now replace Gary Cohn, the former Goldman Sachs executive, as the president’s top economic adviser. Mr Cohn, who is widely seen as having held Mr Trump’s mercantilism at bay, quit the administration on March 6th as it became clear that tariffs were imminent.
 
The policy has evolved somewhat since it was first trailed. Trading partners like the European Union will be able to apply to be spared, if they can find ways to reduce the national security threat posed by their exports. Mr Trump suggested Australian imports may be spared—although the White House insists that for every country excluded, the tariffs will rise, so that they provide the same overall degree of protection.  Canada and Mexico will not immediately be subject to the levies. Instead, Mr Trump is dangling them as a threat over the ongoing—and slow-moving—renegotiation of NAFTA.
 
The question is whether Mr Trump is overplaying his hand. Wilbur Ross, the commerce secretary, insists the administration has no intention of starting a global trade war. The president clearly thinks that America is in a position to dictate the terms of trade to favour of its producers’ interests, and that other countries, scared of losing access to Uncle Sam’s markets, will dare not retaliate. He has something approaching a point. As a huge free trading zone, America depends less on trade flows than most rich countries. It can, if it likes, toss aside its traditional global leadership role, and instead act as a bully, damn the diplomatic consequences.
 
Yet the president underestimates the risk he is taking. A trade war would greatly harm America’s firms and consumers. His comment online that “trade wars are easy to win” has rightly garnered much attention. The more telling part of the tweet was what followed: “when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big.” Mr Trump, always the businessman-in-chief, thinks that the goal of trade is to maximise exports, and that a trade deficit—exporting more than importing—is therefore simply lost money. Were this true, America would indeed have extraordinary negotiating leverage.
 
But this mercantilist logic has been known to be bunkum for centuries. David Hume dispensed with it in a letter to Montesquieu in 1749. Imports benefit consumers, and force firms to specialise in those industries in which they are most productive. Trade barriers impose large costs on everyone—even countries, like America, that import more than the export. Governments, captured by producer interests, do not often acknowledge this fact, though all know it to be true. Unfortunately, it might take a trade war to bring it crashing home to Mr Trump.  
 
 
 

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