Donald Trump really is a protectionist. It is more than mere rhetoric. This is the lesson from last week's announcement that he would sign an order this week imposing global tariffs of 25 per cent on steel and 10 per cent on aluminium.
These tariffs are not that important in themselves. But the rationale used to justify them, their proposed level and duration, the willingness to target close allies and the president’s statement that “trade wars are good and easy to win” must alarm all informed observers.
This action is unlikely to be the end; it is more likely to be the beginning of the end of the rules-governed multilateral trading order that the US itself created.
This may sound alarmist. It should not. True, the proposed actions target only a little over 2 per cent of US imports. If this is where they end, then the world – and the world economy – will surely take it in its stride.
It is possible that, with someone as inconsistent as Mr Trump in charge, this is where it will end. But we cannot bet on it.
One reason US protectionism is likely to spread is that the proposed action, explicitly intended to last a long time, will tax all users of steel and aluminium. These include industries that employ vastly more people than the 81,000 employed in the US basic steel industry.
The users will suffer “negative effective protection”. One result will be that imported products made of steel and aluminium will become cheaper. The “solution” will surely be to put tariffs on imports of these products, too.
Another reason why this action could spread is that those adversely affected could retaliate against the US in other areas. In practice, however, it is more likely that they will take the US into the dispute settlement process of the World Trade Organization, while imposing so-called safeguard protection on steel and aluminium to forestall diversion of imports on to their markets. In this way, too, protection will spread.
A further reason for protectionism to spread is the US use of the national security loophole. The WTO does indeed allow a member to take “any action which it considers necessary for the protection of its essential security interests...taken in time of war or other emergency in international relations”.
But, as Chrystia Freeland, Canada’s foreign minister, suggests: “It is entirely inappropriate to view any trade with Canada as a national security threat to the United States.” Yet once this loophole is used so irresponsibly by the US, of all countries, where might it stop?
A crucial point is that this action is not about China, which accounts for less than 1 per cent of US steel imports. Its victims are friends and allies: Brazil, Canada, the EU, Japan and South Korea. Nor is it a measure taken against some form of unfair trade. This is a purely protectionist policy aimed at saving old industries.
Yet, even on these terms, the rationale is feeble: US steel and aluminium production has been flat for years. If this action really makes sense to Mr Trump, what might not?
For all these reasons, then, we should foresee more protectionist actions by the US and others. Yet a still more important reason exists for expecting this. Mr Trump seems to want a protectionist war. He is sure that a big country with large trade deficits must “win”. Furthermore, he believes those deficits are proof that the US has been taken for a ride by others. Both beliefs are economically ludicrous.
It is a product of a characteristic blend of self-pity — the world is mean to us — and bombast — we can easily bully others into submission.
Yes, the US might be less harmed than others in a protectionist war. But everybody, very much including the US, would be damaged by the Balkanisation of the global economy.
In addition, it is wrong to view trade surpluses as the equivalent of a profit in business, as Mr Trump does. Imports are the goal of trade. Trade surpluses have no intrinsic merit.
Yet this action is ultimately justified by the strong belief that the US has been a victim of the machinations of others. One bit of evidence used to justify this sense of grievance is the idea that the US is “the least protectionist large economy in the world”.
No summary measure of overall protection is ideal. But the least bad one is the weighted-average applied tariff. According to the WTO, Japan’s weighted average tariff in 2015 was 2.1 per cent, that of the US 2.4 per cent and the EU’s 3 per cent. These are very similar. China’s was 4.4 per cent, largely because it has been part of just one global negotiation: its accession to the WTO in 2001, when it was rightly still viewed as a developing country.
Some US policymakers refer instead to the “bound” tariff. On that basis, US protection is relatively low. But a simple average of bound tariffs – the ceilings a country has agreed upon its tariffs – tells one very little about its actual level of protection. Furthermore, the US has bound its tariffs at low levels to obtain concessions from others, notably protection of its intellectual property.
The other grievance is over trade deficits. But these are macroeconomic phenomena, not the result of trade policy. Mr Trump has just signed into law a large increase in the US structural fiscal deficit. Other things equal, this is sure to increase the trade deficit.
This will be particularly true if, as the administration hopes, its tax cuts fuel a large rise in US private investment, while government deficits rise. Does the left hand of US policymaking understand what the right hand is doing? It appears not.
The International Monetary Fund is right to criticise this plan. It will impose substantial costs, disrupt alliances and surely lead to yet more costly protectionism, by the US and others. It is a product of a characteristic blend of self-pity — the world is mean to us — and bombast — we can easily bully others into submission. The result is likely to be further shredding of the fragile fabric of global trade. Well done, Mr Trump.
– Copyright The Financial Times Limited 2018