The President’s Steel Tariff: Making Lemonade Out of Lemons

March 2, 2018

The president’s decision to impose a 25 percent tariff on steel has produced the predicted criticism from downstream steel users worried about price and availability of products they have been importing and from foreign governments standing up for their producers and threatening retaliation. Those of us who have worked on steel over the years, and I have on and off for 40 years, have seen this movie before. It is not the industry’s first import crisis, and it is not likely to be its last.

The U.S. steel industry has often succeeded in obtaining import relief because it has been able to establish two fundamental facts. First, it is an important industry, one which is essential to a modern manufacturing economy. Its disappearance would put us at a competitive disadvantage. (The fact that it is also politically important in some key Rust Belt states should also be noted.) Second, it has unquestionably been the victim of unfair trade practices for many years and, as a result, has accrued a certain amount of sympathy and a view by many that fairness and justice demand some redress.

That is not enough to make the critics go away, but it does help explain why the industry has had some success with its arguments. Of course, the fact that, despite periodic bouts of relief, the industry’s overall situation continues to deteriorate tells us that there is more going on here than simply unfair trade practices. And, indeed, the current episode is a bit different from previous ones in that the blame for global overcapacity lies almost entirely with a single country, China, which now accounts for just about half of global capacity.

The ideal solution in a case like this would be a global agreement on overcapacity in which all producers agree to cuts, some much bigger than others. There is a venue for negotiating that—the Organization for Economic Cooperation and Development (OECD) Global Forum on Steel Excess Capacity—but progress has been slow, and the United States has not put the energy into it that would be necessary to move something along.

Instead, the president has resorted to a tariff, which will probably have the bad effects the critics are alleging, while at the same time providing protection to the domestic industry. Whether the harm he has done will outweigh the benefits to the industry remains to be seen. We may get a hint in our upcoming election cycle as candidates support or oppose his action, and the voters respond.

The more interesting question concerns foreign retaliation. While it will no doubt occur—plans are being hatched as you are reading this—the countries contemplating it should consider carefully what is most in their interests. The obvious reaction is to hit back at the United States through restrictions on our exports that will cause the greatest political pain here at home. The European Union in particular has a good bit of experience developing painful retaliation plans, so nobody should be surprised if one appears soon.

The less obvious but more useful approach is for other countries to realize that a China-caused overcapacity problem is their problem as much as it is ours—that it is Chinese steel flooding their markets and undercutting their prices—and that a smarter move would be to take action against China similar to what the United States has done. Otherwise, they suffer a triple whammy: U.S. tariffs on their steel, higher prices on U.S. imports into their countries due to their retaliation, and more Chinese steel coming their way rather than ours. Focusing their ire on China would eliminate two of those three problems, and it would have the added benefit of pushing the Chinese to deal directly with the problem it has caused everybody else.

This is admittedly Plan B. A global agreement is the best option, and this one is not a pro-trade solution. It would be no more protected from World Trade Organization (WTO) litigation than our own action will be, but in the absence of a negotiated agreement, it is one way to turn lemons at least partly into lemonade, which we sorely need right now.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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