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The Trump administration’s decision last week to impose tariffs on imports of steel and aluminum from Canada, Mexico and the European Union will have costly ramifications, according to experts in international finance, trade and economics.
The tariffs – 25% on steel and 10% on aluminum – will jeopardize U.S. ties with longstanding allies and raise prices of goods that use steel and aluminum, thus hurting demand, investment in factories and jobs on both sides of the equation, they warned. Retaliatory tariffs are inevitable, and the matter could face drawn-out challenges at the World Trade Organization, they said.
According to Ann Harrison, Wharton professor of management and business economics and public policy, the tariff move is “shocking,” both because few expected Trump to follow through on his threats to do so, and because it involved the closest allies of the U.S. “They are just outraged and very upset,” she said of Canada, Mexico and the EU. “This move violates international law, and [these allies] see it as a rejection of longstanding relationships.”
Canada will most likely retaliate with its own tariffs on its imports of U.S. products while it pursues negotiations to find a mutually acceptable solution, said Patrick Leblond, a senior fellow at the Centre for International Governance Innovation in Ontario, Canada. Leblond is also an associate professor and chair on business and public policy at the University of Ottawa’s Graduate School of Public and International Affairs.
Leblond noted that Canadian Prime Minister Justin Trudeau has the strong support of Canadians to push back against the U.S. tariffs. “Canadians are ready to … bite the bullet for as long as it will be necessary,” he said. They would also look for how the tariffs play out on U.S. products exported to Canada against the backdrop of the mid-term U.S. Congress elections in November 2018.
“This move violates international law, and [U.S. allies] see it as a rejection of longstanding relationships.”–Ann Harrison
“The Trump administration keeps asking for things that it knows are impossible, once it seems to think it has a victim on the hook,” said Mary E. Lovely, professor of economics at Syracuse University’s Maxwell School of Citizenship and Public Affairs and a nonresident senior fellow at the Peterson Institute for International Economics. “Our allies are increasingly waking up to that and beginning to have some solidarity in knowing they’re all being treated in a way that is contrary to international law, and which is politically not viable within their own countries. So it doesn’t look like they have many options other than to resist.”
Harrison, Leblond and Lovely discussed the impacts of the tariffs on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
A Trade War Looms
The EU has already challenged the Trump tariffs at the WTO, but it could take a long time for a resolution, said Harrison. Some countries like Mexico have chosen to act without that longer process “because they’re just so infuriated by these actions,” she added. Other countries have described the U.S. move as a “safeguard action” — trade parlance for attempts to protect its industries for domestic reasons — she noted. “It adds tremendous pressure and begins to diminish the rules-based global trading system that the U.S. has established over the last 60 years.”
The matter is likely to weigh heavily at the G-7 meeting this coming weekend in Quebec, Canada, with a sharp divide between the U.S. on one side, and the other six members outraged over the Trump tariffs. The Trump administration had originally announced the tariffs in March, covering several other countries, but suspended them to make way for negotiations on how best to reduce perceived national security threats to the U.S. The administration has since reached agreements with South Korea, Australia, Argentina and Brazil on steel; and with Australia and Argentina on aluminum. It failed to reach similar agreements with Canada, Mexico and the EU, leading to the re-imposition of the import tariffs, effective June 1.
Leblond said Trudeau was hopeful of some kind of a deal before the latest tariff action, but called off a planned visit to Washington, D.C., when he learned that the U.S. would insist on its demand for a “sunset clause” in the renegotiations of NAFTA (North American Free Trade Agreement) that are underway concurrently. Under the proposed sunset clause, the three members of NAFTA — Canada, Mexico and the U.S. — must renew the 23-year-old agreement after five years, or else it would lapse. Trudeau also rejected the U.S. justification of the tariffs on national security grounds. “The idea that we are somehow a national security threat to the United States is quite frankly insulting and unacceptable,” he said at a press meet last weekend.
Lovely noted that the U.S. has always had issues with the EU, such as its demand that the latter lower tariffs on automobiles. She said that with its latest action, the U.S. is following a pattern of “asking for things which are quite extraordinary within the context of the World Trade Organization and how trade liberalization has always happened.”
By antagonizing its allies and trading partners, the U.S. is also undermining the chances of forging a common front to deal with China, Leblond said. He expected the leaders of other countries attending the G-7 summit to impress upon Trump the need to preserve that potential of a common front, but was not hopeful that those entreaties would work. “I’m not sure they will be very successful because this is how Trump tends to negotiate: He hits first and then says, ‘Well, if you want me to stop hitting you, you better accept all these other things that I would like to get from you.’ The other leaders will say, ‘That’s not going to work, and so you choose what you want to do.”
Upping the Ante?
Trump has repeatedly said that the U.S. has been “ripped off by other countries” for years on trade, and has held those countries responsible for America’s trade deficit woes. According to Harrison, “The U.S. has been playing a game of trying to open other countries’ markets for its goods for generations and generations.” She saw the tariffs as more of a negotiating stance on Trump’s part. “He’s really kind of upping the ante and playing a game where he’s saying we feel violated.” She also pointed out that Trump’s claim on trade deficits is misplaced. “[The trade deficit] has nothing to do with exports on the part of other countries. It’s more about the fact that our country borrows more than it essentially makes and it needs to support that in some way.”
Section 232 “affords maximum discretion to the President; it’s a tool that he can pull off the shelf and use rather quickly.” –Mary Lovely
The tariffs will end up hurting everybody, according to Harrison. “The best way to understand this is to think about a bully in the playground,” she said. The bully thinks he’s the strongest person on the playground and makes demands from his friends, but it turns out that he has somehow misjudged his allies and in fact is living in a different world than 30 or 40 years ago, she added. “They’re going to fight back. And you end up in what’s known as a prisoner’s dilemma where everybody fights everybody and everyone is left off much worse off than they were before.” The EU may be one place where Trump could actually get what he wants because it is fragmented with different interests between its members, especially with the Brexit negotiations, she added.
Consumers, Jobs, Investments
Harrison predicted that the tariffs and the retaliatory actions by other countries would lead to higher prices of products that use steel, such as automobiles. “Even if companies redirect their supply chains from other parts of the world in order to avoid the tariffs, it will still mean higher prices in terms of transportation, for instance,” Leblond added.
The resulting higher prices will mean lower volumes as consumers will either buy cheaper cars or delay buying cars, Leblond said. The uncertainty and the higher costs will in turn compel companies to put off investments, or invest in other growth markets like China, he warned. All said, it would impact job creation and wealth creation.
Automakers have estimated that the tariffs would add about 1% to the cost of cars, and they may pass on anywhere between two-thirds or all of it to customers, said Lovely. “If it’s a $5,000 tax, it would funnel through right to the [customer’s] wallet,” she said.
At risk are also the jobs of steelworkers both in the U.S. and in the countries at the receiving end of the import tariffs, as one recent study claimed. Lovely said the auto industry, for example, is so well integrated across the U.S., Canada and Mexico that “we don’t even know how to separate American and Canadian content.” Caught in the crossfire are the unions that represents steelworkers on both sides, and they have argued against tariffs on Canada, she added.
The overall pain may be lessened because the U.S. economy is on an upswing now, Lovely pointed out. “However, we already see a [so-called] Goldilocks labor market, because while unemployment is very low, wages haven’t really picked up the way that we would like to see. This could threaten that.”
The tariffs will also hurt Trump’s voter base. “Trump is ostensibly doing all this for the people, but the people whose interests are most likely to be affected are against these tariffs,” said Harrison, referring to the steelworkers unions. “Part of the reason they’re opposing it is because their brothers in Canada in the same union are also going to be hurt.”
Harrison also dismissed the idea that tariffs could improve the well-being of Americans who are not well off. “The average [annual] wage of the lower 50% of the population is something like $18,000, which is scary, but tariffs are not the way to solve that problem,” she said. “The steelworkers themselves are telling us that.”
The Question of National Security
Lovely said Trump has used national security as the pretext for the tariffs under Section 232 of the Trade Expansion Act of 1962. “It affords maximum discretion to the President; it’s a tool that he can pull off the shelf and use rather quickly.”
“We’re hoping that that the retaliation response from the Canadians and the Mexicans will be enough to put enough pressure on the Trump administration to back down….”–Patrick Leblond
Harrison pointed to two impacts of the Trump tariffs. “First of all, it really denigrates international law in the sense that we all know that it’s not being used for national security,” she said. If other countries take this to the WTO, and it rules against the U.S., “it weakens that body,” she noted. “The second cost, of course, is that it alienates our allies. Therefore it actually weakens national security for us to make this claim, because it puts a big wedge between us and our closest allies who have stood by our side in a variety of different situations, and we could meet again in the near future.”
Hopes of a Rollback
The Canadian government has begun a month-long public consultation process where it would receive inputs from industry and others on how best to deal with the tariffs. If the Trump administration does not roll back the tariffs by then, Canada could impose retaliatory tariffs on imports from the U.S., Leblond said. If Trump follows through on his threat to impose tariffs specifically on automobiles and other products, that would escalate the current situation, he warned.
However, Leblond was hopeful of a rollback by Trump. “We’re hoping that that the retaliation response from the Canadians and the Mexicans will be enough to put pressure on the Trump administration to back down and get back to negotiating in good faith, and try to get a new NAFTA deal that would be good for everyone,” he said.
In the meantime, Canada would engage with its partners in the U.S. at multiple levels — Congress, state legislatures, governors, city-level leaders and the business community, Leblond said. In that exercise, Canada would essentially try to bring as much pressure as possible on the Trump administration to abandon its tariff move, he said. “[The hope is] we can put an end to this. Everyone is hurting with this. No one benefits.”
Join The Discussion
13 Comments So Far
Robert Arvanitis
Stipulate that tariffs are hard, not impossible, to justify.
Also note that politicians are a bundled offering, just like cable deals and dinner specials. In an election, you can’t select specifics, but face a binary choice between two set packages.
THAT said, we accept the populism and occasional boorish of President Trump, in order to have a champion immune to the promoters of the deep state, with their irrational guilt trips and violations of comity, a champion who cares nothing for the whining of the left-biased media.
Uproot the dirigistes and our prosperity will make the frictional costs negligible.
Michele Greene
We have been reminded that war with Britain, France, Spain and their colonies in the New World – Canada and Mexico – never ended. Alexander Hamilton understood this existential threat to the new nation and we are obliged to remember his sound advice. Tariffs and other protectionist measures are n-e-c-e-s-s-a-r-y to protect the ability of our beloved country to manufacture essential products and to protect essential industries inside our boundaries. The law, including international law, is to be respected only when it conforms with natural law and the right to liberty. Educated elites in ivy league schools need a re-education in real economics and politics. President Trump is trying to save us, the jobs of our workers, the productivity of our industries, and the system of law that supports our values. We cannot afford to be ignorant any longer.
Alain Gardner
Someone would have to explain how attacking your closest allies is a good way to improve your security. Allienating them will leave you alone when the bigger fight with the real foes come, and it will.
Listening and negotiating with other trade partners, toward a win-win scenario brings peace and reduce threats, which is the base of real security.
This paranoiac attitude of Trump and his followers is creating more enemies which in turns lessens US safety and lessens US attraction to foreing investment, which will in turn reduce external trade and cut down on export related jobs in the US. The trade war that has started will hurt everyone (rising prices and cost of living, less jobs available, rising cost of homeland security and military) , and particularly the ones it says it seeks to help.
Seeking domination and win-lose scenarios to bring all wealth and power to “the center of power” never leads to long term gains. This is what has lead to the demise of all empires in human history, whether Greek, Egyptian, Roman, Chinese to name a few.
ARe we witnessing the fall of the American Empire ?
Steven Brady
I guess the question to ask is what duties does the US pay on exports to other countries? I know we pay 10% on car exports to the EU, while the EU pays 2.5% to the US. The US pays 25% to China for car exports. I also know that the EU imposed tariffs on Chinese steel last year.
Is it a matter that we are just trying to level the economic playing field. I haven’t seen discussion on this. I would love to see a breakdown on duties (tariffs) charged on US goods, vice versa as they are today.
Linden Cole
Hi, I’m tempted to remind everyone that industries in the US, the UK and elsewhere did not just end up in the mess they are in, and needing protection. Past poor management, costly domestic goods, poor quality, outsourcing to countries with cheaper labor to get short term profits, lack of long term vision … the list is endless. Industries did not have this mess imposed upon them, we have created the conditions that made it possible, and trying to seek protection is only putting off the recognition that somewhere down the line, to get our house in order, something has got to change. We cannot force others to do things our way without expecting some kind of response. Equally, as mentioned, we cannot turn the clock back, not 10, 20 or 30 years and live in the past. We have to face the reality of what the world’s economies are like today. Everything is interwoven, and putting pressure on one area will have consequences elsewhere.
JL Pode
Wow, so everything President Trump does is “bad” and everything Canada, Mexico, E.U. is “good”. How is it that some of our major trading partners have entered into agreements with the U.S.? So Trudeau is fighting for his political survival in Canada as is the current Mexican President. As for the E.U., eh Germany, some member states despise the oppressive control that one country has over the entire structure and there will be several additional withdrawals from it in the coming years. But really, isn’t it refreshing to have a President who represents the interests of the United States and not those of the rest of the world. I am certain an article like this or type was directly placed on the desk of Angela Merkel. How sad.
Dean Abrassart
War, of any kind, with your allies is never a good thing. Get ready for the price on food and other staples to go through the roof. These tariffs will only hurt those that can afford it least. The USA doesn’t even have free trade amongst their own states, I’d love to see the deal Amazon struck for their new head office. Tariffs are an admission of “laziness”. Want to protect American jobs, educate, reduce tax burdens and get the hell out of the way.
Alain Gardner
Right on Dean,
Tariffs are the mark of lack of imagination, education and hard work. The real solution to save american jobs is to stay ahead of the rest ofthe world.
As for JL Pode, your arguments are totally beside the point of the discussion. None of the other doings of Trump are discussed here, he is doing good at bringing pride back to the American workers. He is a great marketer.
Lets have a real, conversation and let the emotions out of it. Constructive criticism and open minded conversation is the best way to find and offer positive win-win solutions to the current problems.
Mary Cipriano
As an American who has lived in Canada for several years, the Trump administration as well as the general population have severely underestimated the magnitude of the insult levied at their Canadian friends. This is no longer just a matter of trade, but of betrayal by your ‘best friend’.
Canada suffered the most in terms of job losses and plant closures due to NAFTA with jobs and investments going to the U.S. and Mexico.
Canadians’ blood has been shed in wars defending the U.S. position, yet they are vilified by a petulant president who can’t bully his way to get what he wants. Thus it may now become a matter of national pride and resolve. Students of history, I dare say the president is not one, will note Canadians have unending resolve in difficult times.
Trudeau’s address to Canadians and the posting of the list of affected goods to lessen the immediate impact on consumers is an indicator that this is not a bluff, but rather a ‘battering down of the hatches’. It also indicates concern for the welfare of all Canadians, not just those who are well-off — something that is characteristic of the country.
Within the last year, American human traffickers have recently deposited about 7,600 people originally granted safe haven in the U.S. and now threatened by Trump’s rhetoric, at Canadian farm fields in upstate New York profiteering from their fear. All the while knowing that about 90% of those fleeing Trump will be refused due to the Third Country Agreement. Does a best friend dump its problems on another rather than resolve them itself? How can the U.S. criticize the Mexican human traffickers when they themselves do the same thing?
Also, American political parties perhaps should remember that many Americans living in Canada, who historically have low voter turnout, may not continue this trend in the midterms and 2020.
This situation saddens my heart as I dearly love my country, but it’s behaviour and degradation of values can no longer be ignored.
Taohidur Imran
Listening and negotiating with other trade partners, toward a win-win scenario brings peace and reduce threats, which is the base of real security. These tariffs will only hurt those that can afford it least. The USA doesn’t even have free trade among their own states, I’d love to see the deal Amazon struck for their new head office.
G Spencer
President Bill Clinton’s NAFTA removed those US Import tariffs that protected US worker pay scales, and that is the main reason that so many US jobs were relocated to Mexico when US workers refused to work for the wages and benefits that Third World workers in Mexico would gladly accept..
President Clinton later granted Permanent Normal Trade Relation (PNTR) to Communist China and this PNTR did the same thing to US workers as his NAFTA did to US workers, except on a much larger scale.
PNTR for Communist China might have also been a secret additional part of Clinton’s “Chinagate” cash contribution deal to grant export license to Communist China for the military TOP SECRET classified Hughes Aircraft Rocket Guidance Technology.
Those higher paying jobs are now gone forever and not coming back to the USA!
The US service jobs such as flipping hamburgers, cleaning toilets, and selling insurance are still left in the USA only because there is not much of any way to relocate those jobs to third world nations, but those jobs do not create any new foreign trade wealth.
Maybe the USA could become re-industrialized and make widgets, then the USA could make and then sell enough widgets to others outside of the USA so that the USA can accumulate enough profit and wealth to enable them to buy other things that the USA needs from other nations that produce those other things (food, shelter, clothing, etc.) that the US citizens consume instead of paying for these necessities and government activities with more money borrowed from industrialized nations.
Then hopefully the USA will then have enough left over to accumulate more taxable wealth for any future emergencies.
The USA can continue to live on credit card charges (printing and selling US Treasury Bonds is similar to using credit cards) to pay for US government activities only until the lenders of real wealth stop increasing the USA credit card limits (stop buying freshly printed paper US Treasury bonds at reasonable interest rates).
Alain Gardner
Hi G Spencer,
Here are some corrections and historic data to your statement:
June 10, 1990: U.S. President George H.W. Bush and Mexican President Carlos Salinas de Gortari issue a statement endorsing a new, comprehensive free trade pact between the two neighbours, ordering talks to begin. Canada would join the talks in 1991, paving the way for three-way negotiations. The United States and Canada inked a bilateral free trade deal in 1988.
* Dec. 17, 1992: NAFTA is signed by outgoing Bush, Mexico’s Salinas de Gortari and Canadian Prime Minister Brian Mulroney, creating the world’s largest free trade area. The timing was, in part, aimed at making it harder for President-elect Clinton to pursue major changes; Clinton had endorsed the deal but insisted on environmental and labour side agreements.
Now for the elements of competitiveness, in the manufacturing of all types, Labour represents on average less than 12% of the costs. The US industrialist keep squeezing it to improve their profits for Mr. Trump and his friends, ignoring that if you circulate more money to employees yo increase the size of your market. The lesson that Henry Ford applied and taught the US economy early in the 20th century.
The way US industries are currently managed cause more than 30% waste in efforts; thus instead of exporting jobs the US industries could have become much more competitive, this would have kept the import down as they cannot compete (they have to add transportation and distribution costs!).
Hope the history facts bring back cool headed non partisan conversation that everyone can benefit from.
Have a great day !
Mathew Feck
Steven Brady – I have exactly the same question as you. Trump’s position is that current trade agreement are unfair to the US. That essentially, there are tariffs applied to US goods disproportionately to those we impose on foreign goods/services. The facts in this are needed to determine if US tariffs are warranted or not.