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Home > Legal & Financial > Trade War! What Is It Good For?

Trade War! What Is It Good For?

By Phill McCoffers

Last month Donald Trump, at a stroke of the Presidential pen imposed harsh tariffs on imports of steel 25% and aluminium (or aluminum if you prefer) 10%, in order to fulfil yet another hastily constructed soundbite delivered on the stump from a candidate which many people believe he never thought for a minute he would be elected, and so would never have to deliver on the promise.

Trump was swept to power, in large part, from that part of the American electorate know as the ‘rust belt’ The mainly midwest swing states with their roots in coal mining, and heavy industry, motor manufacturing and steel production that have experienced radical economic decline over recent decades as the centres of global production have headed East.

The decline in US steel, in terms of jobs has indeed been calamitous. In the 50’s 650,000 were employed in the industry compared to just 140,000 today. Trump has pointed the finger directly at China for deliberate over production, and ‘dumping’ cheap surplus on the US market undercutting domestic production. He is at least partially correct. China has pioneered the production of recycled steel, mostly for its own use, and this uses different technology than the production of steel from raw materials, and comes in quite a lot cheaper. China has, it seems, been guilty of a few sharp practices with regard to its steel exports, but they are a long way from the only culprit for the decline in the US steel business.

China is, in fact the 10th largest steel exporter to the US, with Canada the largest, exporting nearly 10 times as much South of the border. Trump cited a little used piece of legislation referring to protecting national security that allowed him to impose tariff without the need for a political consensus, but the US military uses less than 3% of domestic steel, so it seems a little bit of a stretch to say the least to use it as a justification. Many industry commentators say that the decline in American steel jobs has more to do with falling demand, and greater efficiencies in the industry than external competition, but those are possibly just ‘alternative facts’ so often favoured by the Trump White House.

The implications for this move have wider ripples that possibly could result in greater job losses, increased taxes on US taxpayers and kick start a global trade war that has implications that are difficult to predict.

In these days of global trade many manufacturers import all kinds of raw materials into their supply chain, in the US automakers, aircraft manufacturers, beer and soda companies, the energy industry, and the construction sector all rely on imported steel and aluminium. Substantial increases in tariffs are likely to be passed at least in part to their consumers, bumping up prices. Switching to domestic suppliers is unlikely to be a quick, or cheap process. The price increases are likely to fuel US inflation, have already seen falls in the share prices of related companies, and could lead to possibly the loss of many hundreds of thousands of jobs. Add to this tally the likely implications of a trade war. Russia, China and the European Union have also discussed tit-for-tat tariffs on everything from US soybeans, Harley Davidson motorbikes, Levi jeans and bourbon whiskey with the potential loss of many more US jobs. Quite the price to pay to protect 140,000 steel jobs.

Trump said that he likes trade wars as ‘they are easy to win’, but for every winner there is a loser and I’m not sure you would get even money on the US emerging as victors. Global trade has blossomed since the end of WWII and it in large part the reason why we are as prosperous as humans have ever been. We have more, earn more and spend more than ever before. It has lifted billions of people from poverty and fueled innovation. Steel, aluminium and heavy industry are no longer competitive industries in the developed world where wages and the costs of production are higher than the competition from the Far East. It is surely better to focus on where to innovate next, rather than vainly attempt to turn back the clock.