15 Mar, 2018 image

Is “National Security” Trump’s Excuse for a Trade War?

President Trump has finally delivered on his promise of trade protectionism. But by promising to impose tariffs on steel and aluminum imports on “national security” grounds, President Trump addresses a problem that doesn’t exist—and creates a host of new ones.

Several notable economists think the proposed tariffs of 10% on aluminum and 25% on steel will, at least to some extent, hurt—not help—US manufacturing by triggering declines in orders for critical investments such as robotics, automation, and artificial intelligence (RAAI). Others predict that the tariffs could have the opposite effect, putting pressure on manufacturing to focus on productivity improvements, which could have a positive impact on RAAI.

In either case, the effect on robotics, automation, and AI is likely to be secondary. Not only are the majority of robot systems manufactured outside the US, but the largest consumer of robots (at the moment) is the automotive industry—in which the US only holds 6% of the global market. Compare that to China, who holds 30% of the global automotive market. In its efforts to protect the US from manufacturing threats from China, the Trump Administration is instead creating a trade war that could effectively hand opportunities to China and help further expand its dominance in the automotive and electronics industries.

The “Fake” Problem

The US economy is not in trouble because of declines in steel and aluminum. Today, the US economy is fueled by two key industries: services and high-tech. The old model of the US as a “steel town” has become peripheral, at best. In fact, in the past two decades, the steel industry has largely restructured into mini-mills making specialty products, and those mills are decently profitable. The US aluminum industry, however, may well be in terminal decline, but it’s not a problem any tariffs are going to fix. US production of aluminum has declined by two-thirds since 2012, but the decline is of little consequence because nearly half of the nation’s aluminum needs are supplied by Canada.

Because the tariffs address a problem that simply doesn’t exist, their economic impact will be insignificant. Iron and steel account for about 1.5% of the US import bill, and aluminum for half that. Tariffs will raise overall import prices slightly, impacting metal-intensive industries like automotive manufacturing, beverage packing, and domestic robot manufacturing. But the consequences of these tariffs will be mere annoyance—not enough to derail anyone’s business model.

The real problem is a trade war

What’s the real problem? By thumbing its nose at the global trading system it worked so hard to build, the Trump Administration has the potential to create a very real—and very damaging—global trade war. With the announcement of the tariffs, it is clear that Trump’s “trade warriors” (led by US Trade Representative Robert Lighthizer and trade policy advisor Peter Navarro) have won the bureaucratic fight against the forces of economic reason (led by chief economic advisor Gary Cohn, who has now resigned). The biggest danger is that Lighthizer and Navarro will now lead the charge to more unilateral trade actions that will infuriate allies and further undermine confidence in the global trading system.

Withdrawing from NAFTA—a scenario that is even more likely now considering that Canada and Mexico, hard-hit by the metals tariffs, may find it politically impossible to accede to the US conditions for keeping the agreement alive—could be a first step. However, there is little doubt that, under the premise of “national security,” subsequent trade actions will target China, which accounts for half of the US non-oil trade deficit. But while taking steps to combat Chinese mercantilism may certainly be warranted, there are two reasons the proposed steel and aluminum tariffs will do much more harm than good.

First, by using “national security” as justification for an action that has nothing to do with protecting the nation, Trump opens the door for other countries—notably China—to use the same justification to protect their own industries. WTO rules rightly allow a narrow exemption for national security, and countries use it sparingly. Previously, those concerned about the flood of cheap Chinese steel have found traditional anti-dumping duties effective—as with Obama’s tariffs, and the recent 14-27% tariffs imposed by the EU on galvanized steel from China.

Second, although President Trump and his trade advisors consistently cast China as the key offender in international trade, these tariffs make it far harder to organize resistance to China’s actions. Exports to the US are a small fraction of China’s steel and aluminum output. Canada, on the other hand, is by far the largest exporter of both metals to the US. South Korea, Japan, Germany, Taiwan, and Brazil—all allies and friendly countries to the US—provide steel exports to the US that consume a much bigger share of their production than China. While many of these countries would have been willing to join US-led efforts to restrain Chinese mercantilism and to fight for greater market access in China’s highly protected economy, they will now be asking who really poses the greater threat to the world trading system: China or the US?

At this point, the best we can hope for is that the new tariffs are simply a one-off decision driven by President Trump’s desire to carry a big stick and impose big tariffs—on someone. If the Trump administration is able to shift its focus, then the economic consequences of the new tariffs will likely deliver few consequences. And if the Trump Administration does continue to pursue a genuine trade war with China? Such a move would prove highly disruptive for every multi-national corporation whose supply chains currently cross the Pacific Ocean as easily as they used to cross state lines.

by William Studebaker, President & CIO, ROBO Global

  • Subscribeto RSS Feed

Popular & Recent News

Recent White Papers