June 1, 2018
Making China Great Again
US tariffs on the EU, Mexico, and Canada are a gift to Beijing
By Marie Kasperek
With these tariffs, which came into effect on June 1, US President Donald J. Trump’s administration fired the first shot in a trade war with some of its biggest trading partners and closest allies.
The tariffs will have a significant impact on the economies involved and strain the United States’ relationships with those countries. While this means that it is unlikely that there will be any progress on US trade policy toward the EU, Canada, or Mexico in the near future, it also prevents officials from paying undivided attention to the actual problem: Chinese overcapacity and state subsidies, and bringing Chinese trade practices in line with World Trade Organization (WTO) standards, rules, and regulations.
The EU, Canada, and Mexico
The EU’s mantra over the past few weeks has been that it will not negotiate with “a gun to our head.” It offered to start trade negotiations with the Trump administration on a positive agenda in return for a permanent unconditional exemption from US tariffs.
Nevertheless, the tariffs were levied.
The EU, Canada, and Mexico will retaliate with their own tariffs on US exports. In addition to these retaliatory tariffs, the EU has ruled the US tariffs “illegal” and filed a case against the United States with the WTO.
With its “positive agenda” now off the table, the EU has “closed the door” to trade negotiations with the United States and will go back to the drawing board to decide the future of the transatlantic economic relationship. “When they say American first, we say Europe united,” EU trade Commissioner Cecilia Malmström said on June 1.
While the EU has exclusive rights to negotiate trade policy on behalf of its twenty-eight member states, and the new common “frenemy” is likely to reinforce European unity in the short term, national differences in opinion on how to handle a potential trade war with the United States might put European unity to a hard test. Potential US tariffs on automobiles would be a case in point as they would hit Germany, the biggest global exporter of cars, disproportionally hard.
Similar to the EU, officials in Canada and Mexico are agitated by the US decision to impose tariffs. Andrés Manuel López Obrador, the presidential frontrunner in Mexico’s election on July 1, said Mexico will not be a “piñata” for any foreign government. Canadian Prime Minister Justin Trudeau sees the imposition of tariffs as a “turning point in the Canada-US relationship.”
The Trump administration had used the threat of tariffs to get Mexico and Canada to agree to its revisions to the North American Free Trade Agreement (NAFTA). However, efforts to overhaul NAFTA were unable to overcome major sticking points such as disagreements over rules of origin, dispute settlement, and the inclusion of a sunset clause.
The US tariffs are likely to put, at the very least, a temporary end to NAFTA negotiations. With Mexican presidential elections on July 1 and a small window to present a deal to the US Congress ahead of midterm elections in November, progress seems unlikely before 2019. Meanwhile, Trump might decide to pull out of the trade deal altogether— a point he alluded to in his message to Trudeau.
The US position
Ross sees the situation very differently from his Mexican, Canadian, and European counterparts. He is not worried about the repercussions of the US tariff decision. “The sky has not fallen in the United States since we put the tariffs on. It hasn’t fallen and it won’t,” he said. Nor does he seem worried that the decision will have a negative impact on the United States’ trade relationships with Mexico, Canada, or the EU, who Ross believes will “get over it in due course,” adding “the fact that we took a tariff action does not mean there cannot be a negotiation."
While the tariffs will support national production in the United States in the short term, there are several caveats to consider. In the case of aluminum, the EU, Canada, and Mexico combined account for about 50 percent of total aluminum imports in the United States. While national production might increase slightly, US producers will have to see how much they can produce at a price that will come out under the price of imported products with the tariff added. In addition, it remains to be seen if and how fast this gap would be filled by domestic production—primary aluminum production in the United States has been steadily decreasing over the past few years due to the competitive advantage of other countries that were able to produce at a lower price. Ultimately, an increase in US production would just add to the problem of global overcapacity.
It will be interesting to see how next week’s G-7 meeting, which will include Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, will play out in the context of a looming trade war among its participants.
Unfortunately, it seems like the steel and aluminum tariffs might be just the beginning of the Trump administration’s misuse of Section 232 of the Trade Expansion Act of 1962, which is used to justify protectionist economic measures under the guise of national security considerations. Last week, the Trump administration announced that it was going to investigate whether global automobile imports are a threat to US national security. Trump has also alluded to a possible investigation into Canadian agriculture and lumber.
While the tariffs might be just the latest example of the Trump administration’s trade policy of “chaos and intimidation,” the uncertainty of US policy, combined with the alienation of its traditional allies, calls into question the credibility of the United States as a reliable partner.
In line with WTO procedures, the EU notified the body on May 18 of its plans to respond to US tariffs. In accordance with WTO rules, these retaliatory measures will come into effect after thirty days—in mid-June. Similarly, Canada’s retaliatory tariffs will take effect on June 30. Mexico has not come out with a finite list of US products to be hit with higher export duties, but once the list comes out the tariffs take immediate effect.
Theoretically, there is still a small window to dial back a full-blown trade war before retaliatory measures bite and would, at the very least, spark a tit-for-tat response from the Trump administration. Realistically, the negotiating partners have arrived at an impasse that is likely to spiral into cascading protectionism. This will create an uncertain environment for investors and slow down global growth.
While the Scottish economist Adam Smith once said that the case for free trade “is so very manifest that it seems ridiculous to take any pains to prove it,” it is painful to watch how a country that was the defender of the free trade system is now rolling up the drawbridge instead of forming a united front with its allies against China’s malpractices.
Marie Kasperek is an associate director in the Atlantic Council’s Global Business and Economics Program.