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Trump’s threat of steel tariffs heralds big changes in trade policy

- April 21, 2017


President Trump announced Thursday that he was directing the commerce secretary to investigate whether imports of steel were a threat to U.S. national security. This follows earlier administration plans to “self-initiate” – or start on its own – trade enforcement cases involving countries such as China, Mexico, Germany, Japan or South Korea.

Unlike many of Trump’s formal trade policy announcements, these moves could have an almost immediate impact. They will probably lead to more trade barriers and barriers that are poorly vetted. U.S. consumers will suffer, as well as manufacturers that rely on imported inputs to remain competitive, as will those companies’ employees.

While a political victory for anti-globalists, there will be unintended costs and redistribution. Self-initiated cases are also likely to raise barriers that don’t meet the international legal standards of the World Trade Organization, leading to disputes at the WTO and retaliation from trading partners.

Here’s how U.S. trade law works

To understand how self-initiation works, it’s first necessary to know what U.S. trade law is and who enforces it. Under U.S. trade law, trade cases fall into four baskets. The first is anti-dumping: Did unfairly low priced goods cause injury to U.S. firms? The second is countervailing duty: Did competitors to U.S. firms receive illegal government subsidies? Third is the safeguard: Has an unexpected surge in steel imports hurt the U.S. industry? Finally, comes the exception under which the administration can take action against imports that threaten national security.

These rules are implemented by two agencies. First is the Commerce Department, headed by Secretary Wilbur Ross. Under three of the four major U.S. trade laws, Commerce has a role as both an investigator and judge. The second is the International Trade Commission (ITC), which investigates whether there is “injury” under three of the laws. It has six members – three Democrats and three Republicans – and acts like a judge, determining whether the U.S. industry has suffered lost sales or lost jobs thanks to problematic imports.

Anti-dumping is the most frequently used of these policies in most major economies. In the United States, the ITC investigates whether the industry has been injured, and Commerce investigates the pricing – or “dumping” – question. If there is evidence of both, the U.S. government imposes new trade barriers. The two agencies investigate similar questions under the countervailing duty law. With the safeguard, only the ITC has a role, ensuring that the harm from an unexpected surge wasn’t mostly caused by alternative explanations like automation, a natural disaster, a U.S. labor strike, or bad managerial decisions. Finally, under Section 232 of the Trade Expansion Act of 1962, Commerce investigates whether imports “threaten to impair” U.S. national security.

These laws offer different scope for presidential and administration authority

All this is important, because different laws offer different opportunities for the president. Decisions to impose anti-dumping or countervailing duties are handled by bureaucrats and are never supposed to reach the president’s desk. They also involve relatively well-defined international law, making it harder to take politicized decisions. Safeguards provide the most leeway for the White House to make political decisions – at the end of every investigation, the president makes the call on new trade barriers.

Finally, the national security exception allows the commerce secretary, or a number of other government officials and elected representatives, to trigger an investigation. However, WTO rules that might guide the process are much more poorly defined than is the case for anti-dumping, countervailing duties or safeguards.

Because there are no clearly accepted guidelines, the justification for use of the national security exception is also difficult to refute. It can, therefore, be easily abused. New import restrictions arising under that area of U.S. law really are akin to the “nuclear option” – their use really puts the entire system of international trade law at risk.

The U.S. government has self-initiated cases in the past – but not often

Typically, trade cases are started by U.S. workers, their companies or an industry association. These have been responsible for 99 percent of more than 2,000 investigations taking place since 1980. Self-initiated cases, where the U.S. government itself starts the process, have been extremely rare. Since the modern system of trade law was established in 1980, I have found only 19 instances in the data where the U.S. government fronted a case.

The most recent self-initiation was in 2001 and also covered steel. The George W. Bush administration launched a hotly contested safeguard investigation over $17 billion of imports. Nevertheless, my research shows that case had the same basic trade impact as the 1990s-era industry-initiated cases, when U.S. steel companies also complained about low prices. The main difference today is that ire now focuses on China, where much of the production is state-owned and takes place outside of normal market conditions.

In 1991, the George H. W. Bush administration started a countervailing duty case against softwood lumber imports from Canada. Like steel, that industry hardly needed the effort. Bush intervened immediately after Canada terminated a “voluntary” commitment to restrain wood trade that had been in effect since 1986. This particular trade irritant is also back and may be part of NAFTA renegotiations.

The Reagan administration self-initiated the last anti-dumping case in 1986 over a semiconductors dispute with Japan. But again, this came right after two similar disputes started by major U.S. semiconductor companies. Douglas Irwin at Dartmouth College has described the novelty of the semiconductors case as it eventually was packaged into a deal whereby Japan voluntarily agreed not only to restrain its own exports but also to expand imports from the U.S. semiconductor industry.

The national security exception has been used extremely rarely. However, in 2001, two members of Congress initiated an investigation into whether imports of iron ore and semi-finished steel were threatening U.S. national security. The timing of that case meant it was ultimately considered simultaneously with the Bush steel safeguard investigation, and thus there was little need for redundant import restrictions.

In general, industry doesn’t really need the U.S. government to initiate cases for it; firms do most of the initiating themselves. Contrary to myth, self-initiated cases don’t much help small and medium-sized enterprises (SMEs) to afford legal action –  a Government Accountability Office study from 2013 estimates that most legal costs arise well after the case has started. Indeed, the 19 self-initiated cases since 1980 seem to represent the wants of big firms in politically connected industries that could easily have started the cases themselves.

So what will self-initiated cases do?

It’s plausible that Trump wants more self-initiated cases simply to take political credit for protecting U.S. firms and jobs. Yet this approach will likely have costs.

President Trump, accompanied by Commerce Secretary Wilbur Ross and others, talks about an executive memorandum on investigating steel imports (Photo by Jabin Botsford/The Washington Post)

First, they may create more trade barriers, inflicting pain on the U.S. economy. Steel tariffs would increase costs for U.S. manufacturers and construction companies that rely on imported inputs, making matters worse for U.S. consumers and taxpayers. Even if some U.S. steel jobs end up being saved, it would come at the expense of U.S. jobs in other sectors. And any new import taxes on other consumer or retail goods would likely be regressive – in other words, they would increase prices disproportionately for poorer Americans.

Second, there will likely be less evidence to support these new trade barriers, making them vulnerable to successful WTO actions from other countries. This weakens a 70-year-old U.S. commitment to promote the international rule of law and encourages others to engage in tit-for-tat retaliation. China did this repeatedly between 2009 and 2011, harming U.S. exports and workers in sectors as diverse as poultry, autos and steel.

Finally, these actions may be politically costly. They could open the way to new and harmful allegations of cronyism in the Trump administration. New barriers inevitably create winners and losers. The losers will ask whether the U.S. policymakers behind the self-initiating – whether in the White House, Commerce or Congress – are tilting the playing field to benefit certain U.S. industries and their own investment portfolios, at the expense of other Americans.

Chad P. Bown is a senior fellow at the Peterson Institute for International Economics in Washington. He tracked global use of anti-dumping, countervailing duty, and safeguard policies for over a decade as the architect of the World Bank’s Temporary Trade Barriers Database. Follow him on Twitter @ChadBown.