Citing national security concerns, in March (2018) the Trump Administration imposed a 25% duty on steel imports and a 10% duty on aluminum imports. Have US tariffs launched a trade war? Or is it clever use of a negotiating tactic by the Administration?

Negotiations

Using the threat of the tariffs, the Trump Administration received commitments from Argentina, Australia, Brazil and South Koreato reduce their imports of the products into the United States. Canada, Mexico, and the European Union were granted an exemption until June 1, 2018.

NAFTA partners, Canada and Mexico, had hoped to use this period to reach agreement in the context of NAFTA re-negotiations.The EU proposed a renewal of negotiations to conclude the Transatlantic Trade & Investment Partnership (T-TIP) – negotiations begun in 2013 but which fizzled out under the Trump Administration. The U.S., for its part, sought to wrest concessions similar to ones it received from the other exempted countries such as Australia.

With no meeting of the minds, on June 1 the exemption expired. The closest allies of the United States are now subject to the double-digit tariffs imposed on national security grounds.

Moving Closer to War

By allowing the exemption on its closest allies to expire, subjecting them to the tariffs, the Trump Administration fired the first round in what could lead to a trade war. Its actions have triggered retaliatory tariffs against US exports.

China

China, which was not exempted in March, has already imposed tariffs on US products covering about US$3 billion worth of trade. The first phase comprises a 15% tariff on 120 products, including U.S. fresh fruit, dried fruits and nuts, wine, modified ethanol, American ginseng, and seamless steel pipes. Once the Chinese government has assessed the impact of the US tariffs, a second phase could go into effect comprising a 25% tariff on another 8 products, including pork and recycled aluminum.

Not backing down, the Trump Administration has gone on to announce additional tariffs on US$50 billion worth of Chinese imports and investment restrictions. These new actions are in retaliation for China’s abuse of intellectual property rights, as alleged by the Administration and are to take effect on June 15th. No one expects China to take these threats lying down. Its initial response, however, has been to offer to purchase US$70 billion worth of US energy, agricultural and manufactured goods in the first year of a deal that would lift the US tariffs. Will the Trump Administration take this overture?

European Union

The EU has announced its intention to impose retaliatory tariffs on US $3.3 billion worth of US exports in July. The goods to be taxed include denim, orange juice, bourbon, motorcycles, peanut butter, motor boats, and cigarettes. Should the issue remain unresolved, a second phase will take effect on about 160 US exports worth US$4.3 billion.

Mexico

With immediate effect, Mexico has imposed retaliatory tariffs on US exports valued at US$3 billion. The impacted products are being subject to tariffs of 15 to 25% and include pork, cheese, apples,potatoes, and bourbon.

Canada

Canada’s retaliatory tariffs will take effect on July 1 when tariffs of up to 25% will be imposed on US exports valued at US$13 billion. The impacted products will include steel, aluminum, whiskey, orange juice, and other food and agricultural products.

These retaliatory tariffs are calculated to have an equivalent dollar impact on the US economy as the US tariffs on the affected countries. This approach is consistent with rules of the World Trade Organisation (WTO).

WTO Complaints

Opening a second front,Canada, China, the EU, and India have also filed complaints at the WTO against the US tariffs. As a WTO member, the U.S. has stipulated the level of market access that it will give to all other members. With respect to goods, the Schedules containing these commitments indicate the tariff rate to be applied to goods entering the U.S. WTO members are required to abide by these commitments, but are allowed to deviate in specified circumstances, including to address national security concerns.

Rejecting the national security grounds used by the U.S. to justify the tariffs, the complaints allege that the US tariffs are safeguard measures imposed as protectionist measures, in violation of WTO rules and US commitments. This argument legitimizes the retaliatory tariffs as WTO rules permit a country to demand compensation for the impact of safeguard measures that injure its trade.

These cases will take years to reach resolution, if at all. In the meanwhile, the consultation period required under WTO rules provides another opportunity to reach a negotiated outcome to the impasse.

What Next?

The worst outcome is that retaliatory tariffs escalate into more retaliation, spiraling up into a full-blown trade war that no country wins. At this stage of the game, the best-case scenario is that each side treats these initial actions as negotiating positions and steps back from the brink to do just that. The outcome of the G-7 Summit (June 2018) is disappointing. We will see how the Trump Administration responds to China’s overture and whether the WTO consultations bear positive fruit.

It’s also important to let facts rule over rhetoric. The Trump protectionist agenda projects an America-First policy and attitude that ignores the reality of today’s integrated markets and supply chains. A trade war will hurt everyone, including US consumers and manufacturers.