President Trump’s announcement last week that his administration would levy import tariffs on steel and aluminum to protect those industries in the U.S. has stoked wide-ranging fears. His plan is to impose import duties of 25% on steel and 10% on aluminum. The Dow Jones and the S&P indices reacted strongly, shedding 3% and 2%, respectively, over four successive trading days, before recovering somewhat on Monday.
Trump’s tariff plan is flawed on several fronts, according to experts at Wharton and Fordham University. Trump’s objective to protect the fortunes of U.S. steel and aluminum makers will end up raising prices for those products and hurt all sectors that use them, notably the automobile and energy industries. That, in turn, will depress the stock markets, whose upward climb he has taken credit for, said Wharton finance professor Jeremy Siegel.
The Trump tariff plan would also run afoul of international trade agreements and U.S. compliance with the World Trade Organization’s rules, said Matt Gold, adjunct law professor at Fordham University. Gold was formerly deputy assistant U.S. trade representative for North America. He added that the latest policies on steel and aluminum imports have the support of White House officials with potential conflicts of interest – they have had business dealings with companies in those industries.
Siegel and Gold discussed the implications of Trump’s tariff plan on the Knowledge at Wharton show, which airs on SiriusXM channel 111. (Listen to the podcast using the player at the top of this page.)
‘Severe’ implications, loss of credibility
“This is anything from bad to a complete train wreck,” said Gold. “The implications are potentially very significant and very severe at a minimum.” The tariffs would raise prices of goods and services across the board in the U.S. and undermine the country’s credibility in the global trading system, he added. The tariffs would not just increase prices for all users of steel and aluminum, but also lead to job casualties, Siegel noted. “You’re going to lose auto jobs to gain steel jobs.”
The retaliatory action to U.S. tariffs may not be swift, but it will hit hard. “A bunch of trading partners – the big ones – will take us to court or litigate,” said Gold, adding that it might be a few years before they get the legal authority to retaliate against the U.S. “The retaliation they’ll be authorized to commit will be so severe we’ll have to take away the duties immediately if we haven’t at that time,” he noted. China, Canada and Brazil are among those countries expected to levy retaliatory duties on imports from the U.S., according to media reports.
At the same time, many countries could raise trade barriers against imports from the U.S., according to Gold. “The U.S. government is making an argument that [the steel and aluminum tariffs] qualify as an emergency in international relations and a national security emergency,” he said. “Other countries could argue they have the same exact kind of emergency that would allow them to block U.S. agriculture.”
“We’re risking a global trade war.” –Matt Gold
Gold pointed out that the U.S. is “the world’s foundational economy” and the chief architect of WTO agreements, and a willful violation of those rules “undermines the entire system…. We’re risking a global trade war.”
Siegel did not think a trade war is imminent, but at the same time, he noted that “the risks are not zero.” He likened Trump’s move to the Smoot-Hawley tariff of 1930 that raised U.S. duties on more than 20,000 imported goods. “A trade war is implanted in many Republicans’ minds as a major cause of the Great Depression,” he said. “So Trump is going to have a much harder time implementing this unilaterally without Republican acquiescence, which I don’t think is going to be there.”
Siegel also thought Trump’s move could have wider ramifications. “[It] is not a slam dunk that this cannot escalate into something much worse,” he said. He explained how the fallout could get uglier beyond current expectations. “The biggest threat to the market this year is still going to be rising interest rates,” he noted. “But if this [tariff plan] blows up into something big, it will be a much bigger threat.” He pointed out also its political ramifications, with mid-term elections in November to the House of Representatives and the Senate. “Republicans are [facing] very serious problems with retaining the House of Representatives,” he said. “So there’s going to be much more pushback by the Republicans on this.”
Wall Street Not Amused
Not surprisingly, Trump’s tariff announcement hasn’t played well on Wall Street. “This was always the part of Trump that the market never liked,” said Siegel. He recalled that before the presidential election, “the markets seemed to have a clear preference for Clinton over Trump – and it was mainly fear of trade, tariffs, restrictions, quotas, barriers and whatever.” But once Trump was elected, the markets rejoiced in the prospect of tax cuts, which Trump signed into law in December.
The markets “hoped [Trump] would forget about his other part of his agenda,” which was to adopt protectionist policies that would prove counterproductive and hurt U.S. industries and jobs, said Siegel. “Well, he seems to now have remembered the other part of the agenda.”
The stock markets recouped some lost ground on Monday after Trump tweeted that his proposed tariffs “would only come off if a new and fair NAFTA (North American Free Trade Agreement) agreement is signed” with Mexico and Canada, and demanded that Mexico “do much more on stopping drugs from pouring into the U.S.”
“You’re going to lose auto jobs to gain steel jobs.” –Jeremy Siegel
Not Exactly a Party Mood
Siegel noted several disconnects between Trump’s ideas and the Republican Party and even the White House bureaucracy. “There’s the Republican agenda for the economy, which is good for the stock market, and [Trump is] an enabler of that,” he said. “Then there’s the Trump agenda that differs from the Republican agenda – [on issues such as] trade restrictions and the immigrant restrictions, [which] the market does not like.” In that setting, Trump is sure to get pushback from not just the Republicans, but also the White House and the general public, he added. He also found as “ludicrous” Trump’s comment that the tariffs would enhance national security.
According to a report in the Financial Times newspaper, “The president’s decision came after a chaotic 24 hours in which pro-trade forces in the White House led by Gary Cohn, head of the National Economic Council, fought back against plans to announce tariffs, according to people familiar with the discussions.”
Republicans would be particularly touchy about the kind of tariffs Trump has proposed, and Gold put that in perspective. “It wasn’t just that the Smoot-Hawley tariffs, [which were] implemented by a Republican president and a Republican House and Senate after the crash in 1929, was the major cause of the Great Depression,” he said. “It was that it sparked a trade war which sent the European economy into a downward spiral far worse than the Great Depression here [in the U.S]. Banks failed. Currencies were worthless. And an obscure political party in Germany which had no traction for 10 years – the Nazi party – suddenly came to power. It’s considered the largest single cause of the Second World War.”
Cut to today, and the consequences could be far worse, Gold warned. “The potential catastrophe of a trade war goes way beyond a Depression, especially because what collapsed the economy of Europe in the early 1930s today would collapse the global economy instantly at the speed of electricity,” he said. “You couldn’t have one continent collapsing in isolated fashion.”
Gold also pointed to potential conflicts of interests behind the tariff plan. “Supporting this inside the White House is Wilbur Ross, the secretary of commerce, who made his fortune in the steel sector, U.S. Trade Representative Robert Lighthizer who had a significant number of steel and aluminum clients when he practiced law for decades … and Peter Navarro (advisor to Trump and director of the White House National Trade Council).”
When Tariffs Make Sense
Import duties are justifiable in specific circumstances, and Gold explained those. In January, the Trump administration imposed “safeguard duties” on imports of solar panels, arguing that Chinese companies were dumping them. Last November, it imposed anti-dumping duties on imports of Canadian lumber, citing similar concerns. Safeguard duties, antidumping and countervailing duties are legal under the WTO law so long as they comply with the governing U.S. statutes because in most cases the two are similar, said Gold.
“What collapsed the economy of Europe in the early 1930s today would collapse the global economy instantly at the speed of electricity.” –Matt Gold
But the situation would be different if the U.S. cites threats to national security as a reason to impose import tariffs. The threshold to justify that is much lower under U.S. statute than it is under international law, Gold explained. That is how the U.S. would find itself as a violator of WTO rules, he explained.
Tariffs of the type Trump has proposed are imposed on countries even if they have a free trade agreement between them, Gold said. Only ordinary customs duties get eliminated by free trade agreements, and not special duties like anti-dumping duties, countervailing duties or national security duties, he explained.
Even as the NAFTA link to Trump’s tariff plan is tenuous, Canada happens to be the biggest exporter of steel and of aluminum to the U.S., according to Gold. “The Canadians are beside themselves for reasons that are not surprising,” he said. He noted that the NAFTA negotiations “were struggling anyway” and would probably be put off for a year in view of the elections in Mexico in July and the U.S. midterm elections in November.
According to Gold, as a party to the WTO, the U.S. has obligations that prevent it from imposing the types of duties Trump has proposed. It could, however, press ahead if it is able to justify the tariffs on the grounds of threats to national security. But that would be in conditions where the country is at war or in an emergency situation, which is not the case now. “The long and the short of it is that he’s violating international law,” Gold said. “But under the U.S. statute in this situation, he had to have at least a national security justification.”
While announcing his tariff plan last Thursday at the White House, Trump told representatives of steel and aluminum companies: “We have to get this done … for your company and for your workers and for so much else, even the security of our own nation…. You will have protection for the first time in a long while, and you’re going to re-grow your industries.”
“Here is a president who’s very proud of the fact that the stock market has done very well over his tenure. If the market starts tanking because of these policies, it doesn’t look good for him.” –Jeremy Siegel
“[Trump is] validating myths that his constituency believes – myths about an economy past that no longer exists … in certain places and certain sectors, and myths about what imports do and what trade agreements do and how they hurt different parts of the U.S. economy,” said Gold.
In any event, Trump may be acting a little too late in trying to protect steel and aluminum jobs, according to Siegel. “The workforce has greatly adjusted already to that,” he said. “It’s sort of a time past – the adjustment is made, the jobs have been lost.” He also noted that the U.S. manufacturing sector has been adding about 10,000 jobs monthly, which is just 5% of the roughly 200,000 new jobs.
Eventually, Trump may need to take a cautious approach to his tariff plan, said Siegel. “Here is a president who’s very proud of the fact that the stock market has done very well over his tenure,” he noted. “If the market starts tanking because of these policies, it doesn’t look good for him.” That factor might compel him to reconsider his moves, especially since “whatever positive he has in the polls is due partly to the good markets and the continuation of a good economy.” All said, will he press ahead with his plan? “Trump has made a lot of threats and doesn’t carry through with them,” said Siegel.