Finding a Way Out of the Steel Cul de Sac

President Trump’s March 8 decision to levy punitive tariffs on imports of steel and aluminum was not a surprise, but is ill-advised. To the extent it succeeds in “helping” the U.S. steel industry, it does so at the expense of America’s steel-using industries. It serves no national security purpose, but undermines national security concepts in international law the U.S. argued for, and needs. America’s allies and others should push back.

Protecting What?

The Trump administration argues its decision to impose 25 percent duties on imports of five types of steel and 10 percent duties on imports of aluminum is needed to protect these industries in the U.S. national security interest by bringing capacity utilization in the industry from about 73 percent to 80 percent.

But the Commerce Department report on which the decision is based raises interesting questions. The United States is the world’s fourth largest steel producer, producing about 80 million metric tons (mmt) a year. The largest producer, China, makes over 800 mmt; the second is Japan at 105 mmt, followed by India at 96 mmt.[1] U.S. production has been stable at this 80 mmt level for the past 18 years. Although imports have increased along with overall demand, and now constitute a third of U.S. consumption, it is difficult to argue the U.S. industry is either an infant that needs to be protected or is somehow on its knees.

One reason for the U.S. industry’s resilience: it is already well-protected with laws that require the federal and state governments to buy U.S. steel for defense and most infrastructure needs. Further, both the Obama and Trump administrations have taken action against demonstrated unfair trading practices — subsidies and dumping product for less than fair value. Some 164 of these actions are now in force on imports of steel and steel/aluminum products.[2]

As a result, the using industries — autos, heavy agricultural and construction equipment, autos, oil and gas pipelines, construction — are already paying higher prices, with worse soon to come, undermining their global competitiveness.

Against Whom?

China — often described as the major strategic concern of the administration — is the major target of the dumping and countervailing duty measures taken against unfair sales of steel and aluminum. As such, it has a negligible presence in the U.S. market, comprising some 2.4 percent of U.S. imports and less than one percent of U.S. consumption in 2016. Canada is by far the largest supplier, at over 5 mmt, while Mexico is fourth. And yet the president said in announcing his “national security” measures that the two might be exempted. This weakens the national security argument, and must significantly raise the burden on all others — including Europe, Japan, and South Korea — if the goal is to restrict imports enough to ensure 80 percent capacity utilization in the United States.

The U.S. argument that there’s a global overcapacity of steel production, and that such over-capacity weighs on the U.S. and global industry is correct. As noted above, China produces eight times what its nearest competitor, Japan, produces. Although China has an immense demand for steel, it also exports more than the U.S. produces. This is surely a problem … but the Trump administration’s punitive tariffs do not touch it.

For What Reason?

If the argument for the tariffs is national security, the negligible impact on China and exemptions that increase the impact of this decision on European and Asian allies seem odd, and indeed counter-productive. But it is precisely this national security argument that is the most dangerous part of this decision for the United States.

Of course, there is the precedent: if the U.S. argues it can restrict steel and aluminum imports to protect national security, this allows others to make a similar argument for what are obviously protectionist measures. U.S. exporters of food, manufactured goods and services could find “national security” closing their markets.

But the precedent is less important than the legal implications. The United States is a global power, with global responsibilities that are unique. It has consistently argued for a “self-judging” national security clause in numerous international economic agreements, including the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade (GATT). While jurisprudence prior to creation of the WTO in 1994 veered away from opining on the “self-judging” nature of the security exception (not least as the GATT allowed defendants to block judgements against themselves), it has not been put to the test since. Trump’s invocation of it for such baldly protectionist purposes could well change this.

If the self-judging aspect of the national security exception is indeed put to the test, the United States can only lose. If it “wins,” such that anyone can use the national security exception to justify whatever trade restriction they choose to adopt, every complaint the United States has against unfair trade practices by others will quickly fall to this false rationale. The United States will also lose its credibility as an advocate for a system of rules governing international trade.

But if the U.S. loses, and the national security exception is circumscribed, the implications are far worse. The United States, as a global power, may need to take steps on trade for real national security reasons that the rest of the world disagrees with. Unlike in the UN, the U.S. has no veto power in the WTO. And if these steps are accordingly outlawed, it will have to choose between changing a policy it thinks essential, or leaving the rules-based system it created.

Saving the United States From Itself

America’s friends can and should push back against the Trump administration. They cannot let the decision to adopt these measures stand. This validates the national security argument for protectionism, and could lead the president and his team to “protect” some other industry.

Indeed, even arguing they should not be affected by the tariff decision validates the Trump decision.

Instead, they should stand by their argument that the Trump administration’s move is a weakly-justified “safeguard” action (allowed under the WTO to protect against surges in imports that threaten to threaten serious injury to an industry). This allows them to take certain steps if the United States does not act in accordance with the safeguard procedures under the WTO. If the United States counters by taking other measures, they should go immediately to dispute settlement, knowing that the potential loss of a fully self-judging national security exception (which they have never liked) is of immense consequence to the United States.

If they are exempted from the tariffs — as Trump has indicated Canada, Mexico, Australia, and perhaps others may be — they should not accept this. It makes the whole exercise even worse, a base attempt to threaten harm just to create negotiating leverage. Even if exempted, they should at least associate themselves with the WTO case others will bring against Washington.

Instead, they should try to keep the administration’s eye on the real issue — China’s immense over-capacity, created by a financial system that directed funds to steel production and to the downstream using industries in China. The imbalance in the Chinese economy is huge; it will need to go through wrenching change to address this, just as many U.S. and European industries have done over the past 30 years. But it cannot be allowed to export this problem to others. The United States, EU, Japan, and others need to make China realize that it must deal with its own problems domestically, rather than try to export them.

In many ways, President Trump’s desire to help American steel and aluminum workers who have lost their jobs is understandable. But he is choosing the wrong instrument, and the wrong tactics, to achieve this. Rather than divide the United States from its allies, as this threat of punitive tariffs does, he should be working to unite them to a common cause, to correct the Chinese imbalance.

It is doubtful arguments against an ill-advised step will change the President’s mind. But if the rest of the world sticks together in countering it, there’s a chance he might.