President Donald Trump has proposed imposing stiff tariffs of 25 percent on steel and 10 percent on aluminum, starting next week. This decision is bizarre, costly and ultimately futile, as it will yield no economic or national security benefits.
In principle, the new tariffs are justified by the president’s so-called “Section 232” authority to limit imports that are deemed to endanger national security. The problem, however, is that the Department of Defense does not agree with the conclusion that steel and aluminum imports pose a risk to the United States. Its report on the issue reads: “[T]he U.S. military requirements for steel and aluminum each only represent about three percent of U.S. production. Therefore, DoD does not believe that the findings in the [section 232] reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.”
In fact, the United States imports more steel from staunch national security ally Canada than anywhere else, with 16 percent coming from our northern neighbor. Other top sources include such friendly nations as South Korea and Mexico. In contrast, geopolitical rival China accounts for only 2 percent of U.S. steel imports. In short, there is no national security justification for a sweeping set of tariffs on friends and foes alike.
Even if one accepts at face value the national security finding by the Department of Commerce, these proposed tariffs will exceed its recommended universal 24 percent steel tariff and 7.7 percent aluminum tariff. The president has evidently rejected the Commerce Department’s suggested alternative to these blanket tariffs, as well, which would target steel tariffs to 12 countries and aluminum tariffs to five. In both cases China would have been included, but not Canada, Mexico or the European Union.
Tariffs translate directly into higher prices for consumers and reduced employment in the affected industries. Reflecting these concerns, the stock market fell sharply in the aftermath of the announcement. The economic downside is hardly hypothetical. In 2002, President George W. Bush imposed steel tariffs of 8 percent to 30 percent. Despite the fact that he exempted such key allies as Canada and Mexico, and targeted the tariffs on specific products, estimates suggest that the resulting higher steel prices led to 200,000 lost jobs and $4 billion in lost wages from February to November of 2002.
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But higher prices and lost wages are not the only downside. In response to these tariffs, our trading partners will certainly retaliate.
European Commission President Jean-Claude Juncker said Thursday he would “bring forward in the next few days a proposal for WTO-compatible countermeasures against the U.S.” On the impact of the tariffs on EU exports, Juncker said, “Instead of providing a solution, this move can only aggravate matters.” He further warned, “The EU will react firmly and commensurately to defend our interests.” China has also warned of retaliation in response to section 232 tariffs: “If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” said Wang Hejun, a senior official at China’s Commerce Ministry.
Again, the concern about retaliation is a lesson of history. In 2002, the EU threatened to impose $2.2 billion in retaliatory tariffs against the United States in response to the steel tariffs. This backlash is among the reasons that every living former chairman of the president’s Council of Economic Advisers signed a letter last year urging Trump not to impose tariffs.
Finally, the tariffs are destined to be struck down. The Bush tariffs were withdrawn less than two years later, after several nations brought a lawsuit against the United States at the World Trade Organization, which ruled the tariffs to be illegal. The Trump tariffs face the identical fate.
One hopes that Trump will scale back his proposed tariffs. He has not yet provided details of the exact countries and products his tariffs will target, and for the moment this is simply a sweeping proposal.
Regardless, a national security investigation cannot justify a blanket 25 percent tariff on all steel imports and 10 percent on all aluminum imports. Imposing such a tariff will undoubtedly be challenged at the WTO. In the meantime, these tariffs will result in negative consequences for U.S. consumers, U.S. producers that use imported steel, and U.S. exporters that suffer the retaliation of our trading partners.