While US tariffs on steel and aluminium are aimed at hurting Beijing, they are largely irrelevant. So why are the penalties causing such a stink internationally?
W hen earlier this month Donald Trump imposed tariffs on all US imports of steel and aluminium, there was little about his announcement, or about the vehemence of the international response, that appeared to make sense.
The US president has long been riled by the degree to which the US trade balance is in the red. Last year, the US trade deficit with the rest of the world hit US$566 billion, the widest gap since the 2008 financial crisis. Roughly half of that – or a good deal more, depending whose figures you take – consisted of the US deficit with China.
However, tariffs of 25 per cent on imports of steel and 10 per cent on aluminium will do nothing to narrow the deficit. Steel and aluminium make up just 2 per cent of US imports, and the biggest source of those imports – Canada – has already been exempted.
Nor will the tariffs significantly affect China, the special target of US Commerce Secretary Wilbur Ross’s ire. Shipments from China make up just 2 per cent of total US imports of the metals.
So, at first glance it was unclear why Ross said the tariffs were directed specifically at China, why, if that was the case, there was such a chorus of protest from US allies including the European Union, and why the response from China itself was so vehement.
Historically it is true that Chinese state subsidies to metals producers and exporters have breached global trade rules. Take steel: China’s steel production has grown enormously over the past 20 years, from about 15 per cent of world supply to roughly 50 per cent last year. That growth was propelled by Beijing’s focus on steel-making as a “strategic pillar industry” which encouraged local governments to offer generous subsidies worth an estimated US$20 billion a year to steel companies, largely in the form of cheap capital, free land and subsidised energy and raw materials.
The result was massive overcapacity, exacerbated by central government attempts to consolidate the industry, which merely encouraged producers to grow even faster to stop themselves getting swallowed up by bigger competitors.
Some of that excess production was exported at below-cost prices, in contravention of trade rules. But those breaches have largely been dealt with: today, some 20 countries and trade blocs, including the US, impose more than 100 anti-dumping and countervailing duties against imports of Chinese steel.
In any case, China is taking steps to eliminate spare capacity. Some 5-6 per cent of national steel capacity was scrapped in each of 2016 and 2017. And in recent months, big steel-making provinces have been ordered to shut down half their production as part of Beijing’s anti-pollution campaign. The result has been an increase in domestic steel prices which has disincentivised exports.
In short, US complaints about cheap Chinese metal exports are largely out of date, and in material terms, given the proposed exemptions for big suppliers, the US tariffs are largely irrelevant. So why are the tariffs causing such a stink internationally?
What has really upset US allies, including Europe and Japan, is Trump’s assertion that he is imposing his metals tariffs for reasons of national security. For decades, world trade rules have allowed countries to erect protectionist barriers to trade on security grounds. Moreover, only individual countries have the right to determine what constitutes their own national security. In other words, protectionist measures imposed for security reasons cannot be challenged through the World Trade Organisation’s courts.
Historically, this loophole has very seldom been invoked. The reason is obvious. If one country uses it, and then others retaliate on the same grounds, pretty soon the whole architecture of the rules-based international trade system will begin to crumble.
China has special reasons for concern. The view at the top of the US national security establishment is that China is the US’s main strategic competitor, with Washington and Beijing locked in a zero-sum struggle for economic and technological primacy.
In particular, US policymakers take exception to China’s practice of closing prize sectors of its domestic economy to competition, Beijing’s requirement that inward investments by foreign companies must come with substantial technology transfers as a condition of market access, and the acquisition of US technology companies by state-backed Chinese buyers.
Calls for the US to “get tough” on China are mounting. In the coming months, the US is likely to slap tariffs, fines and other penalties on specific Chinese companies and sectors under US “Section 301” trade rules which allow Washington to impose unilateral sanctions on perceived trade transgressors.
On top of that, Washington is likely to broaden the mandate and strengthen the powers of the Committee on Foreign Investment in the US (CFIUS).
Under the current proposals, not only would CFIUS be mandated proactively to block acquisitions of US companies with technologies deemed sensitive, it would also be able to prohibit US companies from licensing their technologies for use abroad. The goal of these actions will not to be to secure specific trade concessions on trade or market access. Rather it will be to force a fundamental change in Chinese economic policy in which Beijing renounces its long-standing mercantilist approach to trade and investment and agrees to adhere to international standards of behaviour. Failing that, the objective will be to ensure China fails to catch up with the US lead in crucial strategic technologies.
In short, Trump’s announcement of tariffs on metals appears to be the opening salvo in a new economic and technological cold war directed at China. Whether the US can succeed in its aims is doubtful. If Washington wanted to persuade China to embrace both the word and spirit of global best practice in trade and investment, its best tool would have been the Trans-Pacific Partnership agreement.
