Question

On March 8, 2018, President Trump used his authority granted under the Trade Expansion Act of 1962 to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports, effective March 28, 2018. Initially, Canada, Mexico, and members of the European Union were exempt from these tariffs, but this exemption was taken away on June 1. Tariffs, or taxes on imported goods, are the most widely used type of trade barrier and are often considered economically inefficient. Do some research on these tariffs and then address the following:

1. What official reason was given for the implementation of these tariffs?
2. Who will receive the most benefit from these tariffs and who will be harmed by them?
3. Relate these tariffs to the economic principle of comparative advantage and discuss what will happen to production and prices of those products that use steel and aluminum.
4. Explain why some American companies might be opposed to these tariffs.
5. What do you think will be the economic consequences of these tariffs, both domestically and globally?
6. Do you believe the implementation of these tariffs was a good idea? Why or why not?

Answer 1

STEEL AND ALUMINUM TARIFF AND TAXES:

A tariff is a tax on imports or exports. Money collected under a tariff is called a duty or customs duty. Tariffs are used by governments to generate revenue or to protect domestic industries from competition.

There are generally two types of tariffs- Ad valorem tariffs are calculated as a fixed percentage of the value of the imported good. When the international price of a good rises or falls, so does the tariff. A specific tariff involves a fixed amount of money that does not vary with the price of the good. In some cases, both ad valorem and specific tariffs are levied on the same product. For example, A company XYZ produces chocolates in Scotland and exports the chocolates, which costs $100 per pound, to the United States. A 15% ad valorem tariff would require company XYZ to pay the U.S. government $15 per pound to export chocolates. A specific tariff would involve charging $15 per pound of chocolates whether chocolates sold for $200 or $300 per pound.

On March 8, 2018, President Trump used his authority granted under the Trade Expansion Act of 1962 to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports, effective on March 28, 2018. Initially, Canada, Mexico, and members of the European Union were exempt from these tariffs, but this exemption was taken away on June 1, 2018. The official reason given for the implementation of these tariffs or taxes as Trump asserted was, "Trade wars are good, and easy to win." On March 8, 2018, he signed an order to impose the tariffs effective after 15 days.

Who will receive the most benefit from these tariffs and who will be harmed by them?

The EU, Canada, Mexico, Australia, Argentina, Brazil and South Korea were temporarily exempted from the order under a carve-out provision. Canada, Mexico, and the EU became subject to the steel and aluminium tariffs later in an announcement on May 31, 2018.

Relate these tariffs to the economic principle of comparative advantage and discuss what will happen to production and prices of those products that use steel and aluminum?

The law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good, for which they have a comparative advantage. Comparative advantage is the economic reality describing the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price i.e. at a lower relative marginal cost prior to trade. One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries.

It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. Comparative advantage is a term associated with 19th Century English Economist, David Ricardo. Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services, for which they have a comparative cost advantage.

President Trump elected to impose a flat tariff on all shipments of each metal, the most aggressive option offered by the Commerce Department. The stated goals include protecting domestic industry by boosting American steel and aluminum manufacturers, and addressing the practice of “dumping” excess steel into the global market at artificially low prices. Rather than an across-the-board tariff regime; however, the tariff orders provide major US trading partners with some latitude. Canada and Mexico are explicitly carved out from the two tariff orders, at least while talks are underway to revise the North American Free Trade Agreement (“NAFTA”). The orders also leave the door open for other countries to have the tariffs modified or removed if alternative means are agreed upon to ensure imports from those countries no longer threaten to impair US national security. The orders do not, however, set forth specific criteria that countries must meet in order to get their own exemptions. Rather, the orders simply state that a country with which the United States has a “security relationship” can open a dialogue with the administration to discuss “alternative” ways to address the apparent security threat posed by that country’s shipments.

The potential ripple effects from the tariffs could be significant. While American steel and aluminum manufacturers could get a boost, other sectors of American manufacturing might have to contend with the rising cost of importing raw materials if there is not enough domestic supply to meet surging demands. The cost of products incorporating steel and aluminum could increase if manufacturers decide to shift the rising cost of steel and aluminum to consumers. Fears have been stoked that other countries may respond with retaliatory measures, imposing their own tariffs or quotas on American goods, resulting in a trade war. Other countries could face declining sales and job losses if the tariffs cause a decrease in the volume of their trade with the United States. According to press reports, Brazil, Canada, China, Germany, Japan, Mexico, Russia, South Korea, Taiwan, and Turkey were the largest suppliers of steel to the United States in 2017, while Canada, Russia, and the United Arab Emirates shipped the largest share of aluminum imports in 2016.

Explain why some American companies might be opposed to these tariffs?

In the steel investigation, the Secretary made two alternative recommendations to achieve the stated objective. The first was either a global tariff of 24 percent or a worldwide quota of 63 percent of 2017 aluminum import levels, applied on a country and steel product basis. The second alternative was a tariff of 53 percent on imports of steel from Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia and Costa Rica, with all other countries limited to 100 percent of their 2017 import volumes.

In his steel proclamation, President Trump followed the first recommended alternative of a global tariff, but raised the tariff rate from the recommended 24% to 25% and excluded Mexico and Canada.

Similarly, in the aluminum investigation, the Secretary made two alternative recommendations to achieve the stated objective. The first was either a global tariff of 7.7% or a worldwide quota of 86.7% of 2017 aluminum import levels. The second alternative was a tariff of 23.6% on aluminum imports from China, Hong Kong, Russia, Venezuela and Vietnam with all other countries limited to 100% of their 2017 import volumes. These five countries were selected because they are the source of substantial imports due to overcapacity or are potential unreliable suppliers or likely sources of transshipped aluminum from China. Thereby some American companies might be opposed to these tariffs.

Do you think they will be economic consequences of these tariffs, both domestically and globally?

Trade barriers, such as tariffs, have been demonstrated to cause more economic harm than benefit; they raise prices and reduce availability of goods and services, thus resulting, on net, in lower income, reduced employment, and lower economic output. Openness to trade and investment has substantially contributed to US growth, but the US still maintains duties against several categories of goods. The overall effective rate of these tariffs appears low, but varies widely across categories of goods. Some of the highest duties apply to clothing, apparel, and footwear; some of the lowest apply to aircrafts, spacecrafts, and live animals.

Trump argues that the measures are necessary to protect U.S. national security, which he claims has been degraded by the decline of the domestic steel and aluminum industries. Many economists, however, say that previous experience shows that such tariffs will likely fail to revitalize domestic producers while imposing costs on the rest of the economy. Meanwhile, trade experts worry that the tariffs—25% on steel and 10% on aluminum—could set off a trade war that could ensnare some close U.S. allies, such as Canada, and undermine the global trading system.

Do you believe the implementation of these tariffs was a good idea? Why or why not?

Commerce Secretary, Wilbur Ross, announced that hefty tariffs on aluminum and steel imports from the European Union, Mexico, and Canada will go into effect. Steel imports from those places will be taxed at 25% and aluminum imports at 10%

The targeted countries responded almost immediately. Mexico announced it will impose tariffs on American imports in retaliation. EU Trade Commissioner, Cecilia Malmström, said in a statement that Europe would “impose rebalancing measures,” likely meaning some kind of retaliatory tariff on US imports, and take any other “necessary steps to protect the EU market.” Possible European targets for tariff increases include American bourbon, jeans, and motorcycle exports.

This is a big deal. The EU, Canada, and Mexico are (respectively) the United States’ first-, third-, and fourth-largest trading partners. While steel and aluminum tariffs alone aren’t the end of the world, a trade war — defined as the two sides getting locked in a cycle of retaliatory tariff increases — is. A serious decline in trade between the US and these three partners would do immense damage to the US economy and create major consequences for the rest of the world and if US do not get there, the tariffs do serious political damage to America’s relationship with its neighbors and most important European allies.

“Most forms of protectionism are pretty stupid,” Dan Drezner, a trade scholar at Tufts University’s Fletcher School, states. “The Trump administration had truly innovated in finding the stupidest measures and implementing them in the most destructive way imaginable.”

In Trump’s defense, there is a real problem with global steel markets. The issue, called “overcapacity,” is deceptively simple: There are too many factories making too much steel. When a country has a lot of steel and not enough people to sell it to, its government has an incentive to engage in unfair trade practices that give its steel producers a leg up on their international competition.

The problem, though, is that Europe, Canada, and Mexico are not the real culprits behind overproduction — China is. Trade experts cannot fathom why Trump is targeting these close American partners when they are not the real bad ones. “Most of the unfair trading that’s going on in steel and aluminum is emanating from China, and this action does very little, if anything, to affect China,” Michael Froman, a lead trade negotiator in the Obama administration stated. “Instead, we’re hitting our closest allies and partners with a set of tariffs under the justification of national security, while the administration is making it more difficult for those allies and partners to work with us jointly to put pressure on China to reduce its excess capacity.” The immediate impact of these tariffs will be mixed, but probably on net negative. US steel and aluminum industries will now face less international competition, which means they will be hiring and producing more and for all the other US industries that depend on cheaper steel and aluminum — little things like construction and manufacturing. One study, from the Council on Foreign Relations, estimates that the steel tariffs will destroy 40,000 jobs in America’s automobile manufacturing industry alone, one-third of the entire domestic steel industry.

The bigger fear, though, is how America’s trade partners retaliate — and how the Trump administration responds to that. If they do in fact follow through on threats to target iconic US industries, it’s easy to imagine Trump escalating by imposing even more tariffs on these countries in response. That is how trade wars get started, with dire implications for the global economy so if there’s limited upside to these new tariffs and huge risks, why is Trump going through with them? The answer, experts say, rests less in economics than in ideology.