Trundling to Trade War

With a national security fig leaf?

From NYT:

The U.S. Commerce Department has recommended that President Donald Trump impose steep curbs on steel and aluminum imports from China and other countries ranging from global and country-specific tariffs to broad import quotas, according to proposals released on Friday.

The long-awaited unveiling of Commerce’s “Section 232” national security reviews of the two industries contained global tariff options of at least 24 percent on all steel products from all countries, and at least 7.7 percent on all aluminum products from all countries.

The Section 232 provisions are described in this Econofact article, which asks a key question:

The question is whether the threats posed to national security are genuine, or merely a means of protecting domestic industries under the guise of national security.

Even granting a legitimate national security rationale, two further questions arise:

  • Will national security be enhanced or diminished by these measures? Higher input costs might reduce the competitiveness of upstream industries.
  • Will the implementation of fairly rarely invoked Section 232 measures spark retaliation and/or a trade war?

The Commerce Department announcement and two memoranda are here. I find the reports unconvincing. For instance, in the steel memo, it’s noted:

The Department found that demand for steel in critical industries has increased since the Department’s last investigation in 2001. The 2001 Report determined that there was 33.68 million tons of finished steel consumed in critical industries per year in the United States based on 1997 data.7 The Department updated that analysis for this report using 2007 data (the latest available) and determined that domestic consumption in critical industries has increased significantly, with 54 million metric tons of steel now being consumed annually in critical industries.

The 2017 annualized U.S. capacity is estimated at 113.3 million metric tons, production at 81.9 mmt. By this accounting — accepting the Commerce Department’s definition of critical industries — it’s not clear a Section 232 action is justified.

The stakes are high. From Bown (2017):

… Under Section 232 of the Trade Expansion Act of 1962, the President could implement a broad set of import restrictions with very
little procedural oversight.1

While there are national security exceptions embodied in the WTO agreement—in particular, GATT Article XXI—countries have rarely invoked them, mostly out of systemic concerns. Suppose a trading partner with exporters adversely affected by such restrictions were to file a formal WTO challenge. Losing such a dispute would be bad systemically; it provides an aggrieved trading partner license to invoke the exception itself whenever it had a protectionist inclination. America’s invocation of the national security exception on steel invites China to invoke it on soybeans or the European Union to invoke it on digital or Internet services. But winning such a dispute could be worse; such a ruling against the United States could provide the Trump administration with just the political justification it seeks to abandon the agreement altogether.

Further discussion at Econofact, Econbrowser (May), Econbrowser (June), Econbrowser (July).

38 thoughts on “Trundling to Trade War

  1. Moses Herzog

    I just don’t see it happening. Not even VSG is that dumb or self-destructive. If he makes these moves anytime before 2019 it would do major damage to his 2020 election chances (and yes, as much as I hate him, I think his chances are very good in 2020 to get a 2nd term). If he actually enacts these moves, it would be the dumbest foreign policy decision since Reagan invaded Grenada. I’m not saying it’s not worth keeping an eye on, and not saying it’s not worth a blog post, I’m just saying I don’t see it happening. He might try it after 2020 when he knows he won’t be the one to clean-up the mess. But I don’t see it pre-November 2020,. Just don’t see it happening.

  2. pgl

    “The question is whether the threats posed to national security are genuine, or merely a means of protecting domestic industries under the guise of national security.”

    I can remember seminars on this debate when I was in graduate school and that was a long time ago. The domestic steel industry has been begging for generations.

  3. 2slugbaits

    So first you scrap TPP, then bluster about fire & fury on the Korean peninsula, then threaten to invoke Section 232, and then you wonder why our Pacific allies start thinking that maybe it’s best to cozy up with China. And this is the Great Deal Maker? What a moron.

  4. noneconomist

    “One of the greatest contributions the US can make to the world is to promote freedom as the key to economic growth. A creative, competitive America is the answer to a changing world, not trade wars that would close doors, create greater barriers, and destroy millions of jobs. We should always remember: Protectionism is Destructionism. America’s jobs, America’s future depend on trade, trade that is free, open, and fair.”
    Ronald Reagan, Jan. 25 1988 (State of the Union)

        1. pgl

          Reagan complained about “tax&tax and spend&spend” so it changed all of that to “spend&spend and borrow&borrow”!

  5. Not Trampis

    Protectionism always makes a nation weaker. Attempting to use the figleaf of national security is obvious patent nonsense,

    At least Reagan had some decent cabinet members around him when he clearly was non compos mentis. Trump has very few and none that have any understanding of economics.

    This reminds me of the prayer during the rounds down under. My favourite actor was Alan Rickman, My favourite singer was David Bowie so Lord I just wanted to remind you my favourite president is Donald Trump

    1. pgl

      “At least Reagan had some decent cabinet members around him when he clearly was non compos mentis. Trump has very few and none that have any understanding of economics.”

      Granted but the decent cabinet members did not prevent those “Voluntary Export Restraints”. Perhaps the dumbest form of protectionism possible. Yes we had quotas on Japanese cars but Japan got the quota rents and the real beneficiaries were those European automobile manufacturers.

    2. Moses Herzog

      @Non Trampis
      I even thought Reagan’s cabinet was highly over-rated. People always seem to forget Iran-Contra, and many bad things during that administration because the end of the oil crisis and both his and Congress willingness to add to the nation’s debt to create economic growth. I’ll give you, that is a debatable topic and most people who lived through the ’80s probably disagree with me.

      It’s worth noting Caspar Weinberger was busted for perjury twice, and obstruction of justice.

      Alexander Haig FALSELY claimed to be the acting Commander-In-Chief after the Reagan assassination attempt.

      Now, admittedly, this happened LONG after George Schultz was Reagan’s Secretary of State, and therefor has no bearing on the Reagan administration. And I have to admit I am “stretching it” a little. But I do think it speaks to a man’s character when his own grandson (Tyler Schultz) does what is morally right and became a whistleblower on lies and corruption going on at Theranos, his grandfather in essence “disowned” him. It takes one cold SOB to choose a corrupt boardroom position over your own grandson.

      And frankly, I think if you could inject truth serum to most people “in the know” on the Reagan administration, when Reagan was exhibiting obvious signs of early Alzheimers, it was Nancy Reagan and Donald Regan that were calling 75%+ of the decisions in the White House, if not informing the poor b*stard where the nearest restroom was located. It’s pretty well documented in this book:

      1. pgl

        Reagan had a couple of good advisers but a lot of nutjobs. It all depends on who you listen to as President. George W. Bush had some good advisers but listened to Dick Cheney. Trump? All nutjobs all the time. And he only listens to Fox & Friends!

    3. Ed Hanson

      Tramp you wrote,
      “Protectionism always makes a nation weaker.”

      “Always” is a dangerous word to use.

      Red China has been protectionist since its beginning. nd certainly has since it joined the worldwide trade in the 80’s or so. Did protectionism make it weaker?
      Japan was protectionist throughout its rise to a top GDP. Did protectionism make it weaker?
      The US had high tariffs throughout the 1800’s. Did protectionism make it weaker?

      On the other hand the US instituted Taft-Hartley and contributed greatly to the world’s depression. Protectionism made it weaker

      Tariffs create different results at different times, places, and circumstances.


      1. 2slugbaits

        Ed Hanson

        Red China…

        Wow. Haven’t heard that term in ages.

        Tariffs create different results at different times, places, and circumstances.

        I can agree with this. In the simple international econ 101 model, with English cloth and Portuguese wine, tariffs are always bad. In more realistic trade models tariffs sometimes make sense and can be welfare enhancing; however, it’s pretty hard to argue that any of those special conditions apply to the US economy.

        A trade war generally makes everyone worse off, so in terms of the pure economics there’s no particular reason why “Red” China would want to retaliate since retaliation would likely make the “Red” Chinese worse off. But politically a trade war might make a lot of sense and “Trump” the pure economics.

        If Trump is really all that concerned with national security, then it’s probably fair to ask why he is gutting the State Department and resisting DoD’s plans to establish forward supply support activities in the Baltics and Romania. Why is Trump so willing to do Putin’s bidding against the advice of Trump’s own diplomatic and military advisors, but yet so willing to hide behind the fig leaf of “national security” when it comes to protecting his 40 percent base?

        1. noneconomist

          “Red China” had me flashing back to an old Smith Corona typewriter I could barely lift, black and white TV, and the omnipresent “Impeach Earl Warren” billboard on the state highway near my home.

      2. noneconomist

        Ed: You’re comparing a long “closed” economy with one that–especially by Republicans in the 80’s–aspired to open trade wherever? Free markets, freer trade?
        Reagan, if I recall correctly, saw expanding Pacific trade as a huge plus. Our strength, remember, was not BEING like China or those countries producing inferior products while hiding behind an Iron Curtain.
        Secondly, it’s questionable whether 19th century tariffs always strengthened the economy. They certainly produced enough domestic strife mid-century between northern industry, which profited and southern agriculture, which profited less.

  6. lyle

    Bloomberg had an article that suggests that due to warning on Solar Panels 9 months supply was imported right before that tariff went in. The same will happen with steel and aluminum, Of course Lincoln did just the same thing with the requirement that the transcontinental railroad had to use US iron. The same continued until WWI at least. If I used these metals the long time it takes for the mills to grind would, mean that I would import up to a years supply and hold it

  7. Moses Herzog

    Lyle, I’m not disagreeing with you, and your comment is interesting. But something tells me Lincoln wasn’t a big reader of Adam Smith or David Ricardo. But I’m happy to learn if anyone knows different.

    Off topic
    This is related to our budget deficit, not the trade deficit, but still thought it was interesting. This lady is one of the better “follows” on Twitter in my opinion, and she’s quoting Goldman Sachs. I don’t trust everything Goldman Sachs puts out, because sometimes they put false info out to be predatory on their own customers. But in this particular case, I tend to believe them:

  8. Barkley Rosser

    Trump is clearly out to pay off those oppressed autoworkers in Michigan who helped him win the election by raising the cast of steel their companies use to make cars with his national security-enhancing steel tariffs, oh goody.

    1. pgl

      This sounds a like reply of Reagan’s first term. Yes – he had those “voluntary” export restraints on imports of cars from Japan but we also had protectionism for steel. Reagan has a weird mix of advisers.

  9. PeakTrader

    The U.S. may have legitimate concerns.

    The Aluminum Association

    “Eight U.S. based smelters have either closed or curtailed since 2014 meaning only 2 smelters remain fully operational in the United States today – the lowest level of production since just after World War II. And while overall employment in the U.S. aluminum business is up, employment in the upstream segment has dropped dramatically – from more than 12,000 primary production and alumina refining jobs in 2013 to around 5,000 today – a near 60 percent drop in 3 short years.”

    1. pgl

      Aluminum hates real competition. I guess you have finally found a real job – shilling for their crony capitalism!

    2. 2slugbaits

      More misleading garbage from the Russian troll. The fact is that although the US production of aluminum has been declining, we get most of our primary aluminum imports from Canada. The last time I checked the Canadians weren’t our enemy, except perhaps during the Olympic hockey games. Maybe Trump and Peaky see Canada is a threat; I don’t. As this Reuters article makes clear, the real reason for the tariffs isn’t because of primary aluminum imports from China (China actually exports very little), but rather the heavily subsidized Chinese semi-manufactured aluminum products entering the supply chain. Invoking Section 232 hardly seems like the best way to approach the problem of excess capacity and excess production in that part of the supply chain. It’s really just a protection racket for Trump’s 40 percent.

      1. pgl

        Census says we imported over $5.5 billion of aluminum from Canada. So you are spot on. I wonder why Peaky’s masters did not allow him to tell us that little detail?

    3. pgl

      More on those proposed tariffs on aluminum imported from China. The Chinese have said they will respond to this trade war with tariffs on our soybean exports. Could it be that agricultural America will turn on the Republicans as they prefer to bail out the crony capitalists in our failing metals production sectors? Leave it to Bottom Feeder to shill for these guys. Anything for a buck I guess since he can’t get a real job.

      1. noneconomist

        “agricultural America”: California, the heart of agricultural America, exports about $21 Billion/year. One of the major destinations is China which is among the top importers of California exports including almonds, walnuts, and pistachios; dairy and dairy products, wine and table grapes; oranges, raisins, lemons, beef and beef products, cotton(!), plums, cherries, blueberries……it’s a long list.
        Since there are few socialist co-ops doing heavy exporting, perhaps Trump’s conservative ag pals in Congress might offer some influence here. The guy he calls “My Kevin” represents one of the top agricultural regions in the state (and also the country) including solidly red Kern County. The dimwit Nunes–Tulare is a huge dairy region– does the same.
        The question, of course, is whether the constituents of these two close Trump advisers are in any way smart enough to understand what fate awaits them in any prolonged trade wars. I doubt it too.

        1. pgl

          California does produce a lot of ag products. Take Gilroy – home of Nunes – and its dairy farms and maybe the garlic capital of the world. It seems a Democrat may be out to out seat this clown by focusing on local issues as opposed to being Trump’s bitch. BTW – if you ever go to PacBell to see a Giants baseball game, order the garlic fries.

          1. noneconomist

            Good news, pgl. Gilroy is represented by Jim Panetta. Nunes’ district runs north of McCarthy’s and extends to the east/north sides of Fresno. Unfortunately, I don’t see him losing, even though his district would be harmed by a trade war including torpedoing NAFTA.
            Baseball-wise, I usually make it to Oakland a couple of times a year. I had to back out on Giants tickets a few years ago and have regretted it ever since.

    4. pgl

      Imports from China by product:

      Bauxite and aluminum is listed as code 14200.

      In 2005, we imported $658 million of these products from China. By 2012 – this figure had declined to $329 million. Of course Peaky Boo and his masters in the U.S. aluminum sector did not tell us that. Yes – the figure was back up to $$871 million by 2016.

      Wilbur Ross claims that the Chinese are selling these goods at below fair market value – however he defines this. Of course no sane person trusts a word Ross ever says.

  10. Spencer

    Our trading partner’s synthetic and predatory currency manipulation, pegging exchange rates, via the sterilization of FX reserves, either by buying Treasuries, or balanced by foreigners acquiring net holdings of our equities, corporate bonds, and real estate, turns the U.S. into the Pacific Rim’s plantation.

    See Warren Buffett: “Buffett viewed the United States’ expanding trade deficit as a trend that will devalue the US dollar and US assets. He predicted that the US dollar will lose value in the long run, as a result of putting a larger portion of ownership of US assets in the hands of foreigners. In his letter to shareholders in March 2005, he predicted that in another ten years’ time the net ownership of the U.S. by outsiders would amount to $11 trillion (and he was indeed correct, the cumulative trade deficit is now > $11T).

    …”Americans … would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an ‘ownership society’ will not find happiness in – and I’ll use hyperbole here for emphasis – a ‘sharecropping society’.”

    1. pgl

      Buffett wrote that letter in 2005? Yes – one would think our currency would devalue in the long-run but over the next 12 years not so much. And yes our measured net indebtedness keeps growing but here is the funny thing. We still earn more on the foreign assets we hold than we pay on our obligations to the rest of the world. Many explanations for this fact have been grouped under a literature called “dark matter”.

    1. pgl

      “April 29, 1982 THE STEEL. IMPOR T CRISIS INTRODUCTION I America and Europe are again at war over steel. In March 1980, U.S. Steel filed anti-dumping suits against the producers of the European Economic Community, charging them with selling large volumes of steel in the U.S. at prices well below their cost of production.”

      1982! Add steel to my notation that the aluminum sector also has been whining about competition for a long time. One would think someone who complains about regulation as much as PeakyBoo does would not be calling for protectionism but hey!

      Carter backed off but Reagan gave the domestic steel sector want they wanted. Clinton years later did not but George W. Bush did. And we were told Republicans are free traders. Go figure!

  11. ilsm

    Japan made hey buying up US scrap steel and iron, they came back in the form of “giant lance torpedoes” and bombs dropped on Pearl Harbor and Manila………………..

    Concern on steel and aluminum look to the national petroleum reserve. Buy enough to cover mobilizing shuttered facilities.

    War industry mobilization planning is joint pentagon trough and DoC.

    1. pgl

      You see WAR in everything for some odd reason. The issue was trade protection not bombs. Keep on writing these irrelevant tidbits!

      1. ilsm

        The issue was “national security’, with Obama it was neocon empire but now Trump!, as excuse for tariffs……… trade war inside bombings.

        I offered war mobilization options, as well. And a bit of oral history.

        US needs no mobilization it is always at war.

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