Metals tariffs didn’t work, so administration adds more

The weekly trade report with correspondent L.C.

In a Proclamation issued on Jan. 24^th, President Trump admitted that the Section 232 tariffs (national security) imposed almost two years ago on imports of steel (25%) and aluminum (10%) haven’t worked as hoped. They failed to boost the domestic metals sector. Therefore, given that the previous metals tariffs didn’t work, the president will double down by extending tariffs to derivative steel and aluminum products, downstream from raw metals production.

The new tariffs – 25% on products derived from steel and 10% on products derived from aluminum – will take effect on February 8th. Like the original Section 232 tariffs, these will be on top of any existing tariffs. A few trading partners were exempted.

Predictable cost-saving, not “circumvention”

The president suggested that the surge in imports of metal-derived products represents circumvention of the original tariffs: “I have concluded that it is necessary… to adjust the tariffs imposed by previous proclamations to apply to the derivatives” of aluminum and steel. “This action is necessary…to address circumvention that is undermining the effectiveness of the adjustment of imports.”

What’s being alleged here is not foreign evasion of US tariffs in violation of US law. The president is simply using “circumvention” to describe a fully anticipated and legal outcome of the original imposition of tariffs on raw materials: namely, that it would lead to a surge in imports of downstream products seeking to avoid the costly US raw materials tariffs.

The move was a surprise. The fact that the Proclamation was released late on a Friday during a week over-heavy with other news suggests that the White House knew it would be unpopular and didn’t want to call attention to it. The Proclamation is embarrassing because it is an admission that the tariffs inflicted pain on the economy but failed in their goal. They harmed the downstream metals products industry in just the way that economists and representatives of that industry had predicted.

Stop digging

The Administration is not arguing and cannot argue that the tariffs have been effective in protecting the metals sector to the benefit of national security. The Proclamation admits that the metals tariffs have actually eroded the customer base for the domestic industry. The national security rationale shown to be wrong for the initial tariffs has nonetheless been extended to the new tariffs.

Countries with which the White House intends to launch trade talks very soon (most importantly, the EU and India) or phase two talks (Japan and China) were not exempted from the new tariffs. While the US could use the prospect of withdrawing these tariffs as leverage, the new tariffs may also make trading partners wary of entering negotiations for deals that may not assure them immunity from new US protectionist moves.

It is always possible that the Proclamation will be withdrawn or not activated. That happened with the president’s announcement of a doubling of the Section 232 tariffs on Turkish aluminum. It was removed after being ruled illegal by the US Court of International Trade. More recently, this happened with the president’s declaration that he was imposing the steel and aluminum tariffs on Brazil and Argentina despite their having agreed to quotas instead. That declaration was quickly withdrawn. Aside from being strategically and economically silly, it wouldn’t have withstood legal challenge.

Other news (Davos)

At the recent World Economic Forum in Davos, Switzerland:

• The EU and 16 other WTO members unveiled an agreement to set up an interim WTO appeals process without the US. (To force reform, the US is blocking the appointment of judges needed for the Appellate Body to function);
• President Trump invited WTO President Azevedo to come to Washington soon to discuss WTO reform. If successful, the WTO appeals process would presumably be resuscitated in some form. Other reforms will also be on the agenda of their talks, such as self-designation (middle-income countries declaring themselves “developing” in order to obtain important trade concessions);
• The US and France agreed to hold off on going to tariff war over France’s 3% digital services tax. The two presidents opted to give talks at the OECD until the end of the year to come up with a worldwide solution;
• President Trump met with Swiss President Simonetta Sommaruga, with launching talks for a US-Switzerland trade agreement reportedly discussed;
• US and Chinese officials tried to reassure other Chinese trading partners, especially the EU, that they won’t be harmed by the deal.

Other news (elsewhere)

• China’s questionable ability to fulfill its agreement to purchase an additional $200 bn in goods from the US under the Phase One US-China trade deal is encountering further obstacles from the coronavirus epidemic in China. Chinese New Year’s vacations have been extended by a week, many businesses are telling their employees to stay away even longer, and consumer purchases are plummeting as Chinese stay home and cut shopping to a bare minimum. “The current coronavirus outbreak could cost more than 40 billion yuan ($5.77 billion), which would shave about 1 percentage point off China’s 2020 growth rate,” according to the US-based economist Chen Gong, who is quoted in the January 27th Wall Street Journal;
• Treasury Secretary Steven Mnuchin said on January 25th that the UK, which he called “our most important relationship,” is “top of the list” of countries with which the US wants to conclude a trade deal this year;
• The Indian press is reporting that the US and India have concluded the limited trade deal they have been working on. President Trump will probably visit India around February 24th-25th. He might sign the deal then with Prime Minister Narendra Modi;
• President Trump intends to sign the USMCA implementing bill that passed the Senate last week at a White House ceremony on January 29^th, but the USMCA implementing bill may not move quickly in Canada’s parliament. It will need support from some of the opposition since Trudeau now leads a minority government;
• On January 24th, the DHS released its first report on how it intends to fight counterfeit consumer goods coming into the US and being sold on outlets such as especially Amazon.