Economics

A Trade Dispute

The president has made headlines after announcing a series of import tariffs against foreign steel and aluminum, and potential penalties on up to $60 billion worth of Chinese goods. These announcements have kicked-off a new round of trade talks, and have economists and investors concerned about an all-out trade war.

Robert Spendlove and Joseph Mayans Mar 30, 2018

The Story

Equity markets have been on a roller coaster since the president’s announcement of wide-ranging tariffs on imported steel and aluminum. The tariffs, which amount to a 25 percent tax on imported steel and a 10 percent tax on imported aluminum, brought swift rebuke from world leaders and has resulted in tit-for-tat negotiations and political posturing. Since then, several nations have received exemptions from the tariffs; however, China, the president announced, could face additional penalties on roughly $60 billion worth of imports to the U.S. While many economists have decried the president’s actions as protectionist and harmful to the economy, the situation may be more nuanced.

Background

The U.S. has been running a global trade deficit for more than four decades; and China, in recent years, has been a primary driver of that deficit. Many politicians and economists have accused China of engaging in unfair trade practices and sheltering its industries, while the U.S. has allowed greater access to its market. This has created an uneasy relationship between the world’s two largest economies, especially as numerous goods producing industries have declined in the U.S. Over the last 30 years, the U.S. steel industry has faced immense pressure from globalization and has struggled to compete on the world stage. Currently, only about 5 percent of the world’s steel is produced in the U.S., while China produces nearly 50 percent; a change that has been acutely experienced in the “rust belt” communities. By levying import tariffs on steel and aluminum, the president makes good on his campaign promises to revitalize these communities and level the playing field with China.

Graph of Balance
Source: Census Bureau, International Trade Data

Winners and Losers

Trade disputes are generally harmful to everyone involved, but if they are used to spur meaningful change to unfair practices they could potentially be beneficial. There is no doubt that China has been stealing the intellectual property of U.S. companies for years, and if these trade talks could end or cut-back on those practices, U.S. companies would benefit. Also, U.S. steel and aluminum producers may benefit in the short-run, due to less foreign steel being imported to the U.S. However, there will likely be more losers than winners, especially if the current talks lead to a wider trade war. Supply chains are highly globalized and interconnected, and any additional tariff (tax) that is levied along the way is typically passed down-the-line to consumers. In the present case, those industries which rely on foreign steel and aluminum, such as auto- and aerospace manufacturing, construction, and food processing, will be adversely affected. This could be a net negative for the economy, especially since those industries are much larger than the steel and aluminum producing industries. In 2002, President Bush enacted tariffs on imported steel, but was forced to end them early. One study estimated those tariffs cost 200,000 jobs and resulted in $4 billion in lost wages.

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