19 July 2017
Originally published by CapX.
During the 2016 presidential campaign, Donald Trump attracted a lot of support by promising to restore jobs to the American manufacturing sector.
One sector that has been hit hard by purportedly unfair foreign competition is the US steel industry. It supported as many as 650,000 American workers in the 1950s yet now employs only about 140,000. In order to restore American steel’s flagging fortunes, the Trump administration has been exploring increased tariff or quota restrictions on steel imports, citing national security concerns.
Trump upped the ante this month in an exchange with reporters on Air Force One: “Steel is a big problem… I mean, they’re dumping steel. Not only China, but others. We’re like a dumping ground, OK? They’re dumping steel and destroying our steel industry. They’ve been doing it for decades, and I’m stopping it. It’ll stop.”
My research focuses on the politics of trade, including the use of restrictions like tariffs. A look back at the last time a president slapped tariffs on steel is illuminating for the current debate.
The Bush steel tariffs
Imposing steel tariffs is not a new thing. In early 2002, then-President George W. Bush imposed steel tariffs of up to 30 per cent on imports of steel in an effort to shore up domestic producers against low-cost imports. These tariffs were controversial both at home and abroad because, even as they helped steelmakers, they squeezed steel users, such as the auto industry.
They were also seen as hypocritical at a time when the Republican administration was trying to encourage other countries to liberalise trade policies – and reduce their tariffs – through the (now-foundering) Doha Round of World Trade Organization talks.
This case is instructive as to why President Trump may have a tough time imposing steel tariffs.
The general economic view of trade protection says that tariffs transfer money from a good’s consumers to its producers.
Let’s say a country slaps a 20 per cent tariff on imports of beef. The country’s beef producers will be much better off because now imported meat is as much as 20 percent more expensive, meaning domestic companies will be able to sell more ribeyes and raise their prices. That’s bad news for restaurants and fans of steaks and hamburgers, who will pay those higher prices.
This transfer is usually economically inefficient because the benefits that domestic producers receive from a tariff will generally be less than the costs to domestic consumers. In the case of the steel industry, two economists found that the Bush policy would cost US$400,000 a year per steel job saved.
Despite the fact that imposing tariffs is economically inefficient, one of the reasons they still happen is that consumers are typically a very large and dispersed group. While they collectively may lose a great deal of money in higher costs from a tariff, the cost to any one individual may not be that great. Therefore, consumers are often less motivated in opposing trade protection than a relatively narrower and more unified group of producers who have a lot to gain.
Steel tariffs, however, don’t follow this pattern.
That’s because far from being broadly dispersed, steel consumers are heavily concentrated in the construction and automotive industries – which have very powerful political lobbies of their own. As a result, steel consumers are more likely to baulk at the higher prices that would result from tariffs.
In 2002, it was push back from these industries that helped persuade the National Association of Manufacturers to come out against the tariffs. Eventually the World Trade Organisation ruled the policy illegal because it violated US trade commitments, which led to the threat of a trade war with the European Union.
The Bush administration withdrew the tariffs in December 2003, about 21 months after they were imposed, but not without a cost. The Consuming Industries Trade Action Coalition found that 200,000 workers in U.S. manufacturing lost their jobs as a result of the tariffs.
The politics of trade
Of course, there are always competing voices lobbying for and against trade protection, and those preferences alone aren’t enough to push a protective measure into law. That depends on how effective an interest group is in working through the governmental process and winning the support of powerful political patrons.
Some of my own research has focused on this last step. Politicians have an incentive to get elected and reelected to office. Therefore, the differing electoral rules that a country has along with which constituencies are considered pivotal to getting elected will help determine which industry voices get heard when asking for trade protection.
In that vein, the steel industry has several things working in its favor. Trump has said repeatedly that he wants to protect American manufacturing squeezed by foreign competition, and U.S. steel certainly fits that profile. But more importantly, steel production is concentrated in old industrial states in the Midwest, such as Pennsylvania and Ohio. These states have been swing states in recent presidential elections, which gives industries with workers in those regions outsized influence.
The flip side is that this opens administrations to accusations of playing politics with US trade, as was the case with the Bush White House in 2002.
Will Trump roll the dice?
Despite the political advantages that the steel industry has working in its favour, protective tariffs would still be a large gamble by the Trump administration.
The ostensible justification for the tariffs is Section 232 of the 1962 Trade Expansion Act. This law authorises the president to impose tariffs on imports that jeopardise domestic industries deemed to be vital to national security.
While the WTO also allows national security concerns to be used as a justification for extraordinary trade protection, it seems unlikely that other WTO members will accept this reasoning. The Section 232 justification is probably a stretch in this case. Using the steel industry’s own numbers, only about 3 per cent of domestically produced steel in the US goes towards defence industries.
The impact of steel tariffs on other domestic manufacturers such as construction and automotive manufacturing is likely to be bad. However, the bigger concern would be that the WTO again rule such tariffs to be in violation of U.S. trade commitments. Such an event would likely touch off a trade war between the U.S. and its major trading partners, particularly the European Union.
That threat would have negative consequences for US consumers and producers alike.
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