Can Trump’s party steer him away from trade war?
The announcement by Beijing’s Ministry of Commerce of a probe into imports of US sorghum ratchets up the tit-for-tat trade conflict between the world’s two largest economies. The anti-dumping and anti-subsidy investigation into sorghum – of which the US shipped 4.76 million tons to China last year – is a logical retaliatory step after US trade actions against Chinese aluminum alloy sheet and so-called safeguard tariffs against solar panels and washing machines made largely in China.
US President Donald Trump, who sees international trade as a zero-sum game, is clearly fixated on China’s 40% ($347 billion) share of the US trade deficit. He is especially caught up with steel and aluminum products and is currently in negotiations with Congressional lawmakers on potentially broad tariffs in both industries. The White House is expected to decide whether to add additional tariffs on aluminum, steel and other products by mid-April, although Trump’s Commerce Department has already recommended tariffs of at least 24% on steel imports and 7.7% on aluminum.
For their part, Chinese government officials have made it clear they will not sit idly by while the US targets them, saying that “China will work with other World Trade Organization members to resolutely defend our legitimate interests.” Since Trump’s inauguration a year ago, the US Commerce Department has initiated 84 anti-dumping and countervailing duty investigations — up from 52 the previous years.
This may all be in line with Trump’s “America First” pledges, but even if the fight starts over metals, sorghum is an early example of the spillover effects on other industries. As the trade dispute intensifies, many politicians, economists and business leaders worry the situation will harm the global economy in unexpected ways. In the short term, two market sectors in particular stand to suffer through no fault of their own: the many companies in the US who rely on steel and aluminum from non-Chinese producers, and those (like solar panels or grains) which Beijing or Washington target as strategically significant.
Trump received the findings of “Section 232” investigations into the “national security” risks of steel and aluminum imports last month, and Washington has already put producers outside China on edge with mixed messages about potential tariffs imposed under “big sledgehammer” trade legislation from 1962. Talk of internal “activism” on behalf of American producers leaves little room for the imagination. While it’s true Chinese overproduction precipitated the decline of America’s domestic producers over the past two decades, most of the primary steel and aluminum in the US market doesn’t actually come from China. Canada supplies the majority (60%) of American aluminum. Countries like Russia and the United Arab Emirates supply a good deal of the rest.
The difference between China’s coal-fired overproduction, which long paid little attention to market dynamics, and other countries could not be more clear. Russia’s Rusal produces nearly all of its aluminum using clean hydropower and aims to use hydro energy for all production within the next few years. As China’s excess capacity forced prices down, Rusal reduced its own production and capacity substantially to help stabilize the market. Other major producers took similar measures to rebalance the market, including Alcoa, Norsk Hydro, and Rio Tinto.
The metals supplied by overseas companies like Rusal, Rio Tinto, and Norsk Hydro are key materials used by many American industries. Imposing tariffs (and thus raising prices) for steel and aluminum will hurt an entire swath of major industries, from construction to transport and from energy to packaging. The US economy already has case studies to measure the potential impact: when the George W Bush administration imposed tariffs going as high as 30% on steel produced outside the United States, the country lost approximately 200,000 manufacturing jobs. Ironically, those states that suffered the most were the ones at the heart of the Rust Belt: Ohio, Michigan, and Pennsylvania.
It comes as no surprise that America’s domestic industries are uneasy about the prospects of expansive market barriers
With that history in mind, it comes as no surprise that America’s domestic industries are uneasy about the prospects of expansive market barriers. The Aluminum Association trade group responded to the Commerce Department’s recommendations by pointing the White House back to the measures it has recommended all along: government-to-government engagement between Washington and Beijing to address Chinese overcapacity, improve transparency, and hold Chinese aluminum producers to market and environmental rules. By framing the issue as a bilateral one, they consciously rule out unprovoked action against non-Chinese producers.
Even those industries that don’t rely directly on imported metals worry about getting caught up in the ripple effects of Trump’s protectionist stance. Speculation is now turning to which economic sectors will next incur the wrath of either Beijing or Washington. It could be the aviation industry, in which American aircraft manufacturer Boeing competes against Europe’s Airbus to sell jets to Chinese national carriers.
French President Emmanuel Macron recently paid a visit to China, where it was announced that Beijing would spend US $18 billion to purchase 184 Airbus A320 narrow-body jets. The announcement predictably sent Boeing executives into fits. China is a critical market for some of the largest corporations in the US. Their fortunes are tied, in part, to the Chinese government’s willingness to let them sell products and conduct business in the country.
Fully aware of those realities, members of Trump’s own party are pushing back against blanket tariffs and doing their best to make the president understand that global trade itself isn’t to blame and that a trade war between China and the US is in neither side’s best interest. Multiple Republican senators have publicly warned Trump that blanket tariffs would result in net job losses. They also challenge his assertions that the current state of domestic production carries national security risks.
As the influential Congressman Kevin Brady told Trump: “Section 232 is a little like old-fashioned chemotherapy. It isn’t used as much because it can often do as much damage as good.” The world’s two largest economies will have to wait and see whether American’s mercurial president comes to the same conclusion.