Steel pipes
Markets and Economy

The Impact of New Tariffs on Global Commerce

Last week, President Trump announced plans to levy tariffs on steel and aluminum imports, leading to global backlash. But given the benefits of international trade and a general understanding that no one wins in a trade war, it seems unlikely that the situation will escalate.
Jim Glassman, Head Economist, Commercial Banking
March 7, 2018

Last week, President Trump rattled global markets by announcing his intention to levy a 25 percent tariff on imported steel and 10 percent tariff on aluminum. The decision ostensibly targets abusive trade practices that are harming the American metals industry, but it has sparked fears of a broader trade war that could threaten global commerce.

The current set of tariffs is likely to have only a minor—and possibly counterproductive—effect on the US economy. But larger concerns about America’s trade deficit seem shortsighted. The nation’s balance of trade actually is improving as the world industrializes, and free trade helps build overseas markets for American products. The interconnected global economy is creating significant wealth, including for Americans.

The Benefits of Free Trade

Steel and aluminum represent a relatively small—if politically potent—sector of the US economy. But the new tariffs raise the specter of an escalating series of retaliatory measures between the US and its overseas trading partners. Stock markets fell after the announcement, reflecting fears that a disruption in international trade would be devastating to the American economy.

Although the US is currently running a trade deficit of $833 billion, it still benefits from trade. Exports of goods and services total approximately $2.5 trillion every year, and tens of millions of American workers depend on access to customers abroad.

Additionally, the trade deficit broadly viewed—which includes trade in goods, services and investment flows—is actually narrowing. The foreign market for American services has expanded rapidly over the past decade, with US firms now running an annual trade surplus of $261 billion in exported services. In the mid-2000s, the trade deficit reached 6 percent of GDP; now, it has fallen to around 2 percent.

As global trade continues to lift living standards abroad, the foreign market for US goods will likely expand. American companies tend to produce higher-end products, such as mobile software and jet airplanes, which cater to wealthy consumers. The emergence of a large middle class in China and India could create immense demand for American exports.

Unintended Consequences of Tariffs

For many American politicians, the steel industry’s decline has become an emblem of the dangers of global commerce. In the popular imagination, domestic steel mills have been shut down, unable to compete with foreign firms that engage in less scrupulous labor and environmental practices. Some people worry that the industry’s decline has left the US dependent on hostile nations for vital metals.

This is largely untrue. The domestic steel industry is stronger today than it was when former President George W. Bush levied temporary tariffs in 2002, and steel imports are rising again thanks to a strong overall economy. As in most industries, technology and automation have transformed steel production. Workers no longer stream into the sprawling steel mill compounds along the Great Lakes, but technology—not trade—is largely to blame.

The current set of tariffs is being justified on national security grounds, but this pretext also seems largely unfounded. Almost half of steel imported to the US comes from close allies like Canada, Mexico, Japan, Germany, Taiwan and South Korea. Chinese steel and aluminum only account for 4.5 percent of imports; in the event of a geopolitical crisis, the threat of cutting off the supply of metals coming into the US would ring hollow.

Finally, while the tariffs would make domestically produced steel and aluminum more attractive, the move could generate unintended consequences. For example, if the price of steel in the US goes up, manufacturers may look to offshore the production of steel-intensive products like automobiles and large appliances.

Little Danger of a Trade War

Ultimately, the current administration is sensitive to the needs of the business community, and the market selloff has sent an unmistakable signal about the risks of dismantling global trade. The market’s strong reaction to a relatively minor protectionist tariff should caution international leaders against further escalation.

View our economic commentary disclaimer.

 

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