A tit-for-tat trade war would hurt everyone

The United States used to champion free trade. US President John F Kennedy would say that, “a rising tide lifts all boats” but the current occupant of the White House, President Donald Trump, takes a different view. However, with Europe and the US poised to trigger a trade war, there are huge risks for business and jobs.

President Trump’s suspicion of free trade goes back to the 1980s, and his conviction that Japan was deceiving the US. Today his main target is China. But the European Union is also caught in the crossfire.

President Trump initially announced on March 8 plans to impose tariffs on steel and aluminium imports. The duties are 25% on steel and 10% on aluminium. On March 23, he announced a temporary exemption for the EU, but only until May 1.

President Trump seems to welcome the fight. “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he tweeted.

Even before President Trump signed the order for the tariffs, the EU had drawn up a hit-list of retaliatory sanctions against targeted US imports worth €2.8 billion, which is the amount of injury the tariffs are calculated on the European economy. At their summit in Brussels on March 23, EU leaders called for Trump’s exemption to be made “permanent,” and said the US decision “cannot be justified on the grounds of national security”.

In trade, as in other areas, one thing leads to another, and then another. The scene is now set for a tit-for-tat trade war. This could be costly for businesses, not just the steel and aluminium industries, but their customers, and those hit with retaliatory sanctions. This is the moment for businesses on both sides of the Atlantic to step up and play an active role in trying to prevent this trade spat from escalating.

Figures in Europe and America have tried to talk Trump down. International Monetary Fund chief Christine Lagarde has warned that “No-one wins in a trade war.” European Commission chief Jean-Claude Juncker bemoaned the “stupid process” of retaliatory tariffs. “But we have to do it,” he added. German Chancellor Angela Merkel talked of “a spiral where we would all lose.” But French president Emmanuel Macron lashed out at what he saw as Trump’s threats. “We don’t talk about anything out of principle with a gun to our head,” he said.

Much of the US political establishment is also against the move. Trump’s chief economic advisor, Gary Cohn, resigned over the tariffs. And US House speaker Paul Ryan, from Trump’s Republican Party, said he feared “unintended consequences” on US firms that needed cheap metals to make their products.

Trump’s rationale for the tariffs is a yet-unidentified threat to US national security, which would be allowed under World Trade Organisation rules. But if China is the real target, these tariffs seem misplaced, as China is not even one of the top 10 sources of US steel imports. As Trade Commissioner Cecilia Malmström noted, “We cannot see how the European Union, friends and allies in NATO, can be a threat to national security.”

It ties in with another China trade issue that Trump is trying to address: he has begun the process of slapping tariffs on up to $60 billion in Chinese imports over alleged intellectual property theft. Here, at least, the EU has some sympathy: it too feels that Beijing has been flagrantly ignoring copyright rules.

There is also the threat to the global rules system, in particular the WTO, which the US did so much to create. Other countries will interpret the tariffs as a signal that the US is retreating from leadership on trade.

Even if the EU and other partners were to bring the case to WTO and were to win it, the US will likely reject the ruling. If the tariff fight is to be resolved, it will probably be outside the framework of WTO rules, with the EU and other partners being forced to negotiate with the Trump administration to try to ease the impact of the tariffs. There is even the threat that, if the rules are ignored, the WTO may not survive this incident.

But it is President Trump’s assertion that trade wars are “good and easy to win” that worry the EU most. Officials in Brussels warn of the opposite, that trade wars are bad and easy to lose.

No-one benefits from a trade war: they hurt not just trade but jobs and investment, while raising prices in the countries concerned. In the US, the aim is to defend the steel and aluminium industries, but by contrast, the industries that depend on cheap steel and aluminium – home-grown or imported – are much larger.

Malmström has met with US officials in both Brussels and Washington to resolve the situation. She says that the main problem in the global steel market: China’s overcapacity by state-owned companies. Her language suggested calmer heads might be working behind the scenes to help resolve the situation. If businesses join in the debate, pushing both sides towards dialogue, it may be possible to pull them back from the brink.

Authors: Pietro Bertaggia, Jim Currie & Leo Cendrowicz

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