Donald Trump’s decision to carry out the threat he made in March to slap tariffs on steel and aluminium imports from some of America’s closest allies seems likely to spark a trade war and could call into question the whole future of the Western alliance. Europe has already responded with outrage and tit-for-tat retaliation seems inevitable. But the American president regards his move as a necessary spur to negotiations that he hopes will lead to fairer trade for the United States. So is his action justified and what risks is he taking with the future of world trade and with the cohesion of the West?
Central to Donald Trump’s campaign for the presidency was his claim that the American economy and the livelihood of American workers were being put in jeopardy by globalisation, the system of multilaterally-agreed, rules-based free trade created largely by his predecessors in the White House. In particular he argued that the old manufacturing sectors such as steel and car-making were being crucified by a flood of cheaper imports made possible by the system. His case had resonance with voters in the Rust Belt, where such industries had been in long-term decline, and it was their support that won him the presidency.
Mr Trump’s promise was to protect these industries by curbing imports and putting an end to ‘unfair practices’ that he believed thwarted American exports. His chief target was China, with which America had built up a huge trade deficit as a result of China’s using the opportunity of globalisation and its relatively cheap production costs to flood America and other export markets with cheap goods. But the new president also had in his sights Canada and Mexico, the co-signatories with the United States of the North America Free Trade Agreement (Nafta), negotiated by President Clinton, and the European Union.
It took some time for President Trump to take action but earlier this year he unilaterally imposed tariffs of 25% on a range of steel imports and 10% on some aluminium imports. His purpose was to bring his trading partners to the negotiating table to rewrite rules he hoped would be more favourable to America. In the case of Nafta and the EU he delayed the implementation of these tariffs in the hope that they would start talks.
China essentially took it on the chin, no doubt because its steel and aluminium exports to the United States are relatively small. And it has embarked on discussions with the US on what to do about its huge trade surplus with the US. But Canada and Mexico were much less willing to roll over and the EU flatly refused to negotiate under duress saying that only if the United States agreed beforehand permanently to lift the threat would the EU sit down to talks.
On Thursday the American president lost patience and imposed his steel and aluminium tariffs on Nafta and the EU. The Canadian prime minister, Justin Trudeau, denounced the move as ‘totally unacceptable’. The French President, Emmanuel Macron, rang his friend Donald to tell him that it was not only unacceptable but illegal under the World Trade Organisation rules, which are the basis of globalised free trade.
The American side disputes this, arguing that WTO rules allow for such action when ‘national security’ is at stake. But most observers regard this as a transparent ploy to get round the rules. Liam Fox, Britain’s international trade secretary, and a committed pro-American who hopes to negotiate a favourable trade deal with the US after Brexit, described the national security justification as ‘patently absurd’.
The effect on Europe’s economy of the new tariffs may not be that great since the volume of EU (including British) steel exports to America is relatively low (Canada and Mexico will feel the pinch much worse). In Britain, 31,000 people work directly in the steel industry which has annual sales of £3.8bn, but only 7% of its steel exports (worth £360m) go to the United States.
Europe’s real worry is where Mr Trump’s protectionist instincts may lead him. Last month he announced an investigation into car imports and is reported to have told President Macron that he wants to see an end to so many Mercedes driving round Manhattan. Tariffs on European cars would be far more damaging to the EU economy, especially Germany’s but Britain’s too. While Germany’s steel exports to the US are worth only £1.2bn a year, its car exports are worth £20.2bn. Britain’s car exports to America are add up to £8.6bn.
So it is hardly surprising that the EU (which, while Britain remains a member, negotiates trade on behalf of Britain too) has responded by threatening new tariffs on American imports. Jean-Claude Juncker, the EU Commission president, said on Thursday: ‘The US now leaves us with no choice. Our US friends are turning their back on anything that smells like multilateralism.’ The EU already has its own targets for higher tariffs, including Bourbon whiskey, orange juice from Florida, Harley-Davidson motorbikes and cosmetics and is likely to impose them soon. Britain’s trade secretary, Dr Fox, said: ‘It would be a great pity if we ended up in a tit-for-tat trade dispute with our closest allies’, but he did not suggest that the EU should not retaliate in any circumstances.
Even in Washington, and within his own party, there are sceptics who share this alarm. Paul Ryan, the retiring Speaker of the House of Representatives, condemned the imposition of tariffs on the EU and Nafta, saying it was wrong to target America’s allies ‘when we should be working with them to address the unfair trading practices of countries like China’. But as a consequence of the President’s actions a ‘tit-for-tat trade dispute’ looks inevitable.
President Trump has said that a trade war would be an ‘easy win’ for the United States but not everyone is convinced. They point out that imposing tariffs on steel and aluminium imports won’t automatically lead to a resurgence in America’s domestic suppliers of such products which face other reasons for their decline. Furthermore, the tariffs will increase the cost to other industries which use steel and aluminium, even threatening jobs in those industries as rising prices put demand for their goods at risk. And of course retaliatory action by America’s trading partners will hurt American exporters: Mr Trump’s action won’t be going down very well with orange juice producers in Florida or Bourbon distillers in Kentucky.
At a more fundamental level, many economists say that the whole rationale behind Mr Trump’s protectionist policies is misguided. They argue that America’s huge trade deficit has little to do with supposed unfair trade practices and everything to do with the country’s propensity not to save and to overspend, a propensity they claim will have been made worse by Mr Trump’s recent unfunded tax cuts. Because America saves so little but (being such a large economy) invests so much, it needs to attract investment funding from abroad: its trade deficit is just the flip side of that. China’s trade surplus with America is what pays for its massive investments in the United States. Economists who take this view argue that globalisation is good all round because it increases the overall volume of trade and therefore of global economic activity. Protectionism threatens to reduce the trade volume and so make everyone poorer. So don’t unilaterally rip up the trade rules, they say.
But Mr Trump still believes the existing rules do penalise American industry. He wants to renegotiate them (for example, the EU imposes a 10% tariff on American cars) and hopes his new protectionist measures will spur trading partners to come to the table. Wilbur Ross, his Commerce Secretary, points out that China is a good example of a country that is playing ball by talking, despite the tariffs, and insists that America wants to start serious negotiations with Nafta and the EU.
The issue then is whether these two trading partners are prepared to talk under duress or whether they will calculate that it is more in their interests to play Mr Trump at his own game by upping the ante through retaliatory measures of their own.
For the EU and Canada there is wider context in which this choice needs to be seen. Most EU countries and Canada are also members of NATO, the Atlantic alliance formed for the defence of all its members and in which the United States has for seventy years been the dominant partner. Not upsetting the Americans would normally be a major consideration. But Mr Trump has expressed scepticism bordering on scorn about how NATO is run and what its use to America may still be. Furthermore, he has shown himself very willing to take action unilaterally without being bothered what his NATO allies might think: tearing up the Iran agreement and moving the US’s embassy in Israel to Jerusalem are just two recent examples. When President Juncker says that ‘our US friends are turning their back on anything that smells like multilateralism’ it is not just about trade that he is speaking. If Europe comes to the conclusion that America is abandoning multilateralism and its old alliances more generally, then it may decide to take a tougher line on trade and regard the era of the western alliance as coming to an end. That is the risk Mr Trump may be taking.
What’s your view of Mr Trump’s imposition of tariffs on his old allies? Is it justified or not? From America’s own perspective, will it be of benefit or not? How should the EU respond? And what risk, if any, do you think his move poses both to the health of the world economy and to the future of the Western alliance?
Let us know your opinions.