President Donald Trump said last week that he has decided to impose tariffs of 25 percent on all steel imports and 10 percent on aluminum imports. Markets over-reacted in predictable fashion, and the move was widely condemned by many economists and other commentators. But the costs of trade protection have been widely over-estimated, and these tariffs can provide the foundation for eliminating widespread predatory trade practices that have defied solution for the past two decades.
More broadly, addressing unfair trade in steel and aluminum can set the stage for shrinking overall U.S. trade deficits, which would help rebuild U.S. manufacturing industries.
The crisis in steel and aluminum trade is driven by the development of massive amounts of excess production capacity, which has led to import dumping by China and a number of other countries singled out in the Commerce Department’s reports on its investigations into the national security threat posed by imports of steel and aluminum products.
Over the past two decades, China and other countries have made huge investments in excess steel and aluminum capacity, and used massive subsidies to drive down prices below cost, driving many producers, especially in the United States (which has the world’s most open markets), out of business. Dozens of U.S. steel mills and aluminum smelters have closed, eliminating more than 100,000 good jobs.
Worse yet, China and other countries are using that artificially subsidized metal to take over world markets in a wide range of downstream industries ranging from auto parts to washing machines and wind mills. So, the first step in ending unfair trade is to get rid of excess capacity in steel and aluminum.
The goal of trade policy in these industries should be to level the playing field so that world-class domestic producers can compete fairly on global markets. Tariffs will help achieve that goal. The costs of the global tariffs proposed by Trump will be minimal. If imposed on actual imports in 2017, the tariffs would cost less than $10 billion (and surely imports will fall with the tariff). That’s less than .05 percent of our GDP, which exceeded $19 trillion last year, an infinitesimally small amount.
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But even that figure is too large. In 2002, President George W. Bush imposed broad, across the board tariffs of 30 percent on steel. The independent U.S. International Trade Commission estimated that actual losses from those steel tariffs were only $30.4 million, or less than one-thousandth of one percent of GDP in 2002. But we can do better than this.
United Steelworkers President Leo W. Gerard suggests a way forward for improving and better targeting the steel and aluminum trade remedies. Gerard has suggested that Canada should be exempt from the tariff (the United Steelworkers represents both U.S. and Canadian plants), and that Canada should commit to “robust enforcement” and to “cooperation to address global overcapacity in steel and aluminum.”
Simply put, Canada should join the United States in applying the same tariffs to unfairly traded steel and aluminum from China and other countries identified by the Commerce Department (including Brazil, South Korea, Russia, Vietnam and six others in steel; and Hong Kong, Russia, Venezuela and Vietnam in aluminum). Canada should also forswear retaliation against the United States in these cases. And we should offer the same deal to other fair-trading countries in the European Union, Japan and others that would meet these conditions. Herein lies the path to a cooperative, global solution to addressing the problem of global overcapacity in steel and aluminum trade.
But even if we eliminate unfair trade in steel and aluminum, those products make up only a small part of the overall U.S. goods and services trade deficit, which reached $566 billion in 2017. Growing trade deficits are largely responsible for the loss of 5 million U.S. manufacturing jobs over the past two decades, and rebalancing trade is the key to rebuilding U.S. manufacturing. The single most effective tool available to rebalance trade and rebuild manufacturing is to re-align the U.S. dollar, which is 31 to 44 percent over-valued, relative to the currencies of China, Japan and the European Union, the major surplus economies of the world.
In 1971, and again in 1985, the United States used broad, across the board tariffs, or the threat of tariffs, to rebalance currencies and global trade, most recently in the 1985 Plaza Accord. With growing trade deficits, it may be time to consider such measures again soon.