Steel tariffs don’t get at root of the problem: China’s overcapacity

President Trump will invoke tariffs on a wide range of steel and aluminum imports. This combative action is one of a number of options for the president detailed in the Commerce Department’s report on the effect of steel and aluminum imports on the national security.

The president’s legal authority to restrict imports using this rationale is based on a rarely used provision of U.S. trade law, Section 232, which allows tariffs and other restrictive actions for imports “that threaten to impair the national security.” The actions are designed to increase the capacity utilization level of these struggling industries and increase their profitability. 

{mosads}The U.S. soon will see higher prices for steel and aluminum products, which will feed through to the thousands of everyday products that use these materials such as cars, soda and beer cans and building materials. Higher prices will not be the only negative effects.

The use of Section 232 is not well-grounded in international trade law and will almost certainly provoke retaliation from our trading partners.

As bad as the president’s chosen option is, the Commerce report includes options that are even more damaging. One particularly counterproductive idea is to impose much higher tariffs on a number of countries that are deemed “unreliable” sources or are thought to be likely candidates for circumvention of tariffs imposed on other countries, such as China.

All the other countries would not be subject to the higher tariffs but instead would be subject to quotas equal to 100 percent of their 2017 exports to the U.S.

This option is highly problematic for several reasons. First, Section 232 makes no reference whatsoever to an assessment of the specific source of the imports which are “weakening our national economy.”

Even worse, the imposition of high tariffs on a small subset of exporting countries would result in a windfall for the other countries — mostly Europe, Canada and the UAE — which would be able to continue to ship substantial production at the higher prevailing prices to the U.S. with no compensating tariff to hinder them.

This means that under this option, companies and workers from those countries, not U.S. companies and workers, would be the primary beneficiaries of higher prices. U.S. users of steel and aluminum would be saddled with higher prices while third countries were reaping much of the benefits of those higher prices.

Finally, long experience has shown that imposing different tariffs for different countries is a recipe for circumvention via transshipments and other illegal means, so the assumption that shipments will be frozen at 2017 levels is highly suspect.

The most disappointing aspect of the president’s imminent decision is that it fails to adequately address the root cause of the steel and aluminum industries’ problems: massive overcapacity in China.

The president’s failure to meaningfully address the main problem means that his decision will cause of lot of problems without providing a sustainable solution for the industries. The president must address Chinese overcapacity on a priority basis.

If after all this, the president remains determined to take the action he has indicated he favors, to have a chance at achieving benefits for U.S. workers and companies and to avoid illegal transshipments, he must apply the same tariff treatment to all nations with no exemptions.

Further, given the dubious foundation and the totally uncertain outcome, rather than promise his actions would be in effect “for a long period of time” the president should ensure a review of the actual results after nine months or a year and change policy accordingly.

I urge the president to eschew the worst options in the Commerce report and to address overcapacity in China now. 

Michael Delaney is a former assistant U.S. Trade Representative and chairman of the Trade Policy Staff Committee. He is consultant for trade policy and negotiations with Transnational Strategy Group in Washington.