Making sense of President Donald Trump’s steel tariff proposal

President Trump made global headlines by announcing a controversial plan to impose a 25% tariff on foreign steel and a 10% levy on aluminium products.

Trump’s threat to impose steel tariffs is not unprecedented. In fact, nearly every president in modern US history (going back to Richard Nixon in 1970) has imposed tariffs on steel imports while in office. Barack Obama is the only recent US president not to impose broad tariffs. He did, however, impose significant restrictions on imported steel from China.

However, steel tariffs are unlikely to help the US economy and save American manufacturing. Several studies have concluded that the last major round of steel tariffs, imposed by President Bush in 2002, did more harm than good to the US economy. Many US manufacturers using foreign steel inputs simply passed higher prices on to consumers. Others sought out cheaper substitute materials to avoid the higher cost of steel.

Steel directly employs about 140,000 US workers, according to US government data, compared with 650,000 in the 1950’s. Economists are still debating how much of this decline can be attributed to growing imports, but they tend to agree technological change and recycling of scrap metal have played a much larger role. In any event, repeated interventions by US presidents have done little to reverse the long-term decline in US steel industry employment.

It is likely that domestic politics are the main driver of these protectionist policies. Economists and US business associations have consistently opposed tariffs, but ordinary people (in the US and elsewhere) are generally much more sympathetic to nationalistic promises to protect workers from nebulous and uncaring foreign corporations.

In America, the steel industry is concentrated in Pennsylvania and Ohio, which are populous and politically important states. Any president will likely need to win at least one of these states to secure re-election. Trump’s success in winning both states in 2016 was partly ascribed his campaigns against “unfair trade” and promises to “get tough” with trading partners. In his move to impose tariffs on imported steel, Trump may be trying to solidify his support base with labor union voters that have traditionally favored the opposition (Democratic) party.

Unsurprisingly, Trump’s steel tariff proposal has fewer fans abroad. Major trading partners such as China, the EU and Canada have responded with dismay, anger and promises of reprisals. The EU has warned of retaliatory tariffs against American goods such as motorcycles, denim jeans and bourbon whiskey.

The Canadian Prime Minister, Justin Trudeau, said US tariffs would be “absolutely unacceptable” and China too expressed “grave concern” over the plans. Japan’s steel industry also urged Trump not to impose steep tariffs on imports, warning it would have “serious harmful effects” on trade worldwide.

The Vietnamese government has expressed concern over Trump’s plans, although they are unlikely to have a major direct impact on Vietnam’s economy. The US accounts for 11.1% of Vietnam’s steel exports, but steel accounts for less than 2% of Vietnam’s total export portfolio.

Other countries will likely see a much stronger impact, but these are not the ones that tariff advocates normally have in mind. Although protectionism’s proponents in America often invoke unfair competition from China, which is also seen as a potential US security threat, that country ranks 11th in terms of US steel imports to the US. Ironically, many of the biggest exporters of steel are US treaty allies, such as Canada, South Korea and Japan.

Unfortunately, these tariffs could have major indirect and unintended consequences. The danger is that a single tariff such as this one could result in a wider global “trade war” as other nations move to retaliate and protect domestic industries. In the 1970’s, broad tariffs imposed by Richard Nixon contributed to weaker growth a high inflation in the US and elsewhere. More infamously, the Smoot Hawley tariff, which was authorized by US president Herbert Hoover in 1929, helped spark the global depression of the 1930s.

Trump’s recent statement that “trade wars are good” and “easy to win” indicates he won’t back down from his threats on tariffs. It is possible that these measures will go down as a minor footnote in history, much like the 2002 tariffs imposed by President Bush. But if a tit-for-tat retaliation ensues on a global scale, major trade deals such as KORUS (US-Korea FTA) or NAFTA (North American FTA) could potentially unravel.

Although global recessions are famously difficult to predict, uncertainty about global trade flows could induce a period of declining business confidence and global financial market turmoil. Therefore, even if the direct impact of steel tariffs on Vietnam’s economy would likely be small, they could represent the first shots fired in a global trade conflict that would hurt everyone.

*The author is Business Development Manager at Global Integration Business Consultants in Ho Chi Minh City.

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