When US President Donald Trump made good on his promise last week to impose a 25 percent tariff on steel imports and a 10 percent import tariff on aluminum, the impact was keenly felt by Canada, Mexico and the European Union. Some countries, including South Korea, Brazil and Taiwan, escaped tariffs by making concessions, but will still be subject to quotas or volume limits.
Europe and Canada have been quick to respond to the US move, by threatening retaliatory tariffs on imports of whiskey, peanut butter and motorcycles. Such goods originate from congressional districts that are Republican to the core, and their hope is such tariffs would hurt Trump’s popularity in November’s mid-term elections. Canada and the EU also plan to invoke the World Trade Organization’s dispute resolution mechanism.
Canada’s Prime Minister Justin Trudeau was particularly outraged at the move against one of the US’s closest allies, with 75 percent of Canadian exports going to the US.
Despite the increasingly heated rhetoric from all sides, this is still less of a trade war than a trade skirmish. But there are danger signs on the horizon that suggest things could escalate further.
Trump has invoked the national security of the US as the reason behind the tariffs move. The WTO’s rules allow for such a rationale, but only if they are in the field of armament or nuclear materials. The US has further-reaching domestic legislation, passed at the height of the Cold War. Trump now risks having his justification of national security scrutinized by the WTO’s bureaucrats in Geneva, which cannot be in the long-term national interest of the United States.
Moreover, Trump’s definition of national security is selective, to say the least. He differentiates among allies, letting some off the hook, while accusing others of breaching US national security concerns.
It’s small wonder that US Treasury Secretary Steven Mnuchin cut an isolated figure at last weekend’s meeting of G-7 finance ministers at the resort of Whistler in Canada. It simply cannot be in the United States’ long-term national security interest to alienate its closest allies.
Sadly, such international outrage at US economic policy may play well with Trump’s base. They have bought in to his promise to “Make America Great Again,” and, like the president, don’t believe that bodies such as the G-7 or the WTO serve that purpose.
Trade skirmishes and trade wars have a negative impact on global growth, which in turn would mean less global demand for crude.
Cornelia Meyer
So far the retaliatory measures threatened by the EU, Canada and others are fairly benign. But if Trump makes good on his threat of imposing a 25 percent tariff on car imports, things could escalate very quickly.
The US imports 44 percent of its yearly purchases in light vehicles, with 98 percent of these cars hailing from allies such as Germany, Canada, Mexico, Japan and South Korea. The German automotive sector in particular has created a two-way street, establishing production sites in the US. BMW actually exports cars manufactured in the US to the rest of the world.
Threats of these new tariffs have already had their impact; reports last week that Trump was targeting German car imports wiped billions off the value of Daimler, BMW and Volkswagen.
Trump and his Secretary of Trade Wilbur Ross are particularly bothered by US trade deficits, with Japan, South Korea and Germany standing out. Other allies, such as France and Italy, are less affected. Potentially this could drive a wedge between the “targeted” allies and the ones deemed benign by the US administration. This would be particularly difficult for the EU, which has enough on its plate with Brexit and unstable governments on its southern rim.
Creating such instability in its alliances can’t be in the US’s interest. And it is certainly not in the long-term interest of the global trading system to revert away from multilateralism to punitive bilateralism.
Such trends are significant too for GCC countries, for whom oil is still by far the largest export. Trade skirmishes and trade wars have a negative impact on global growth, which in turn would mean less global demand for crude. Economic transformation strategies, such as Saudi Arabia’s Vision 2030, depend heavily on the ability of GCC countries to freely and fairly engage in easy trading relationships.
The global system of multilateral trade faces significant dangers, and needs to be strengthened, with the WTO playing a key role as arbiter. There will be no winners if such a system breaks down, least of all the US
- Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources