Behind the tariffs

On Thursday the 1st of March, U.S. President Donald Trump shocked the world by announcing an intention to impose import tariffs on Steel and Aluminium (STAL). The proposed tariff rates, 25% and 10% respectively, are the result of a report released by the U.S. Department of Commerce on the 16th of February. The report concluded that current steel and aluminium imports “threaten to impair the national security” in their current state of affairs.

The key finding of the report pertaining to a national security threat is the domestic production of steel being necessary for “defense requirements and critical infrastructure”. This result led to the recommendation of a minimum 24% global tariff being applied to steel imports, with 12 countries having a tariff rate of at least 53%, including China and Russia.


Similar to the findings relating to the steel industry, the aluminium industry decline is considered to be another threat to national security, and is blamed on “foreign government subsidies”. A minimum tariff of 7.7% was recommended by the report, with a 23.6% rate on China, Russia, Hong Kong, Venezuela and Vietnam.


A threat to national security


The decline of the U.S. STAL  industries has been considered a national threat under section 232 of the Trade Expansion Act of 1962. National security is considered “at risk” due to the inability of the domestic industries to produce sufficient quantities of respective commodities. In turn, they provide the Defense industry with a reliable stream of the materials needed for construction and manufacturing.


A greater risk to U.S. national security are the long term economic effects that the tariffs are going to have. The medium-term effects of some companies, such as the U.S. Steel Corporation, promising to recommence operations will be dampened over the long run without appropriate policy management. Protectionist trade measures may increase the amount of production in targeted industries, but this will be to the detriment of those purchasing the materials produced in the form of higher costs passed on. Over the course of modern history, infant industries protected from foreign competition have often failed to innovate and grow enough to sustain operations in a competitive market. They lack the incentive to perform since they hold greater market power as protected oligopolies.


Industries lacking innovation and growth lead to upward pressure on prices, the simple solution would be to subsidise the purchase of domestic steel and aluminium. This model, the Import-Substitution model, was employed by many South-East Asian countries prior to the Asian Financial Crisis of the late 1990’s. Without appropriate policy incentivising a robust and sustainable business model, the U.S. steel and aluminium industries will repeat mistakes of the past.


Impact on Australia


Trump confirmed Australia would be exempt from these tariffs in a March 10 press conference, stating “great flexibility and cooperation will be provided to those countries that are really friends of ours”.  Although Australia remains immune from the protectionist policies put in place by Trump, it is the retaliation of other countries which has the potential to have an impact on Australian trade.


Uncertainty surrounding the ultimate outcome of a global response to the tariffs will impact stock markets around the world. The ASX is highly correlated to the NASDAQ and DJI, at around 85% and 87% respectively on a month-to-month basis and as such the Australian stock market will follow trends of the U.S.. Given that protectionist policies will strengthen the U.S. economy, the Australian economy is likely to strengthen as well. However, amid growth in the strength of the U.S. economy, global growth is also likely to fall as exporters of STAL products are affected. The overall effect on the Australian economy can’t yet accurately be predicted.


In the event of a trade war being waged, Australia could benefit handsomely at the expense of a great many others. Foreign policy should discourage a trade war due to the larger ramifications. However if it is unavoidable, then Australia could become the trade hub to link U.S. markets to countries such as China facing the tariffs. Yet doing so may risk the strong relationship between Australia and the U.S. as it would be seen as undermining the Trump administration's attempts to strengthen domestic STAL producers. In such an unpredictable global political realm, Australia needs to be cautious and remain impartial so as not to antagonise the economic powerhouses of the world, given our economic ties to them.


Global trade war or empty threats


The European Commission (E.C.) announced it would propose “ firm and commensurate” counter measures within days, in response to the United States’ decision which it labelled as a “blatant intervention to protect the US industry”. In a statement, the E.C. promised to “not sit idly while the European steel industry is hit with unfair measures that put thousands of European jobs at risk”. The full extent of any retaliatory policies to be put in place by the E.C. remains to be seen, but this does set an example for surrounding nations to follow suit. There has been no update from the E.C. to date on any counter-measures that may be imposed.


The risk of a global trade war heightened when China’s foreign minister Wang Yi  guaranteed a “necessary response to counterbalance ” the recent punitive tariffs put in place by America. Trade tensions between the world’s two largest economies have risen since Trump took office in 2017, and although China only accounts for a small fraction of U.S. steel imports, its industrial expansion has helped produce a global glut of steel that has driven down prices.


In light of the latest announcement from the Chinese Ministry of Commerce, counter tariffs worth $3b will be “imposed to offset its loss incurred by the U.S.’s decision”. Spokesman, Hua ChunYing, of the Ministry also stated that “we want no trade war with anyone, but if our hands are forced, we will not quail nor recoil from it”. This gives the impression that despite some statements suggesting that China will not engage in a trade war, there is still an impending threat.