In June 2017 this column addressed problems with trade barriers, especially tariffs that are “manipulated favoritism” and result in forms of protectionism, often with unintended consequences. Then, in December 2017, we discussed the rise of the People’s Republic of China and problems they have caused the industrial world through both intellectual-property theft and manufacturing dishonesty as well as the apparent permanence of the current regime in power. These two subjects are combined here and project an unstable outlook.
First, it is important to recognize the differences between types of trade barriers. An embargo is a prohibition of commerce or trade and is considered a strong diplomatic measure. It might mean limiting or banning exports or imports, creating quotas, or imposing tolls or taxes. The effectiveness of an embargo depends on international participation.
Sanctions are an economic tool of foreign policy, most often instituted to coerce regime change. Tariffs are instituted to protect a nation’s industrial sector from foreign producers of competitive goods. (The World Trade Organization ruled in 2004 that U.S. steel tariffs placed on China and Russia in 2002 were illegal, and they were removed.) Unique wrinkles in tariffs are addressed in Section 232(b) of the Trade Expansion Act of 1962, where the president has broad discretion powers to impose high tariffs when national security is at risk; and in Section 301 of the Trade Act of 1974, which provides the U.S. Trade Representative (USTR) legal authority to deny trade benefits or impose import duties in response to foreign trade barriers.
Understand that, this year, Congress has not discussed or proposed any legislation related to the subject of tariffs, trade sanctions or embargos in any way related to manufacturing industries of interest to IH readers. Nothing meaningful or pending from this do-nothing branch of federal government has happened or is on the horizon as of this writing in early March 2018.
Wilbur Ross, U.S. Secretary of Commerce, however, has suggested three options to President Trump that will aid the current and growing instability and market losses in the nation’s steel and aluminum production sectors: a tariff of 24% on all steel imports; a 53% tariff on all steel products from 12 nations; or no tariff but impose a quota on all steel imports at a level of two-thirds the level of last year.
Regarding aluminum, a 7.7% tariff could be levied from all countries, or a 23.6% tariff imposed on all products from China, Hong Kong, Russia, Vietnam and Venezuela. Spokesmen from the steel sector and steel unions applaud these options, but their counterparts in the aluminum sector are more “reticent” and suggest greater focus on the real problem of China’s “overcapacity.” (Note that two years ago only 2% of U.S. steel imports came from China, which today produces over half of the world’s steel and aluminum.)
Nobody, except words in a study by Mercatus Center, pointed out that for every steel-industry employee helped by the tariff being considered, 38 workers in other sectors would be hurt. Meanwhile, it will probably not be until mid-April that the President decides on his preferred option between tariff, sanction(s), embargo(s) or nothing at this time. The best option, as I view it, is a global quota system based on 2017 exports to the U.S. at 63% for steel and 87% for aluminum from all exporting nations to American markets and has been suggested as a form of sanction.
Quite honestly, the real American problem here is not steel or aluminum foreign overcapacity in production. The problem is China’s overcapacity and bullying of the world marketplace, which is made more complicated by world resellers obscuring product origins. Honest sourcing of U.S. imports must be strictly monitored and understood. This function is the responsibility of the Office of Foreign Assets Control of the Department of the Treasury, which administers and enforces economic sanctions. American steel and aluminum production is important, but this sector cannot request and receive relief at the expense of other U.S. industry.
All American manufacturing must be protected equally from the real, current threat posed by China as it strives for global dominance. Imposing tariffs is not a simple balancing of internal national interests because it can cause “more harm than good” without addressing the ultimate problem that is growing on our horizon. President Trump and Congress in their turn must address the real issues for U.S. metals industries posed by China.
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