President Donald Trump has been threatening to invoke a measure in a 1962 law which would limit steel imports on national security grounds. Though the World Trade Organization (WTO) included a clause from its inception which recognized the precedence of national security over international trade, the option is seen more as a line of last defence. Because the wording is vague and the act itself is accusatory, going down such a path would likely lead to retaliation instead of any long-term solution for US refiners.
This is exactly what has recently entered the news cycle. The Financial Times recently indicated that the EU could target US agricultural products if President Trump decides to turn his words into action. By targeting agricultural and other politically sensitive goods (the US does not export enough steel to the EU to be targeted), the EU will be sure to get its message across. Specifically, The Financial Times mentioned Kentucky bourbon as a target, a specialty from your correspondent’s state. The EU has certainly calculated that the Senate Majority leader is from the same state, which effectively amplifies the message. On Friday, the first day of the G20 summit in Hamburg, the European Commission president Jean Claude Juncker said of the EU position that “Our mood is increasingly combative”.
This is not a new issue, however. The US Department of Commerce has been working for the last few years on introducing antidumping measures. Additionally, in the waning days of the Obama administration, the US sued China for using subsidies to illegally support their refiners. What is new is President Trump’s plan to invoke Section 232 of the Trade Expansion Act of 1962. Last invoked by the US in 1982 to ban crude oil from Libya due to Muammar Gaddafi’s unreliability, the act allows for the President to restrict imports for national security reasons. While it would send a message to China, invoking Section 232 may hurt a host of US allies as well, including Canada, Japan, South Korea, and Germany. For example, Canada is by far the largest exporter of Aluminum to the US. According to the US Census Bureau, Canada accounted for 48.5% of aluminum entering the US, while China accounted for only 6.2%.
Aluminum also plays a central role in Kentucky’s export economy. Since 2015, aluminum has attracted attention for a reason other than itsPresident Trump has sensed a politically potent issue, but the execution is flawed. On Thursday, the EU and Japan announced that they arrived at an agreement on a trade deal. This trade deal, spurred on by Japan when the TPP fell through, gives the EU unprecedented access to Japanese agriculture markets, among other things. If opportunity costs were being measured, then the potential loss to the US agricultural community would make waves. First mover advantages matter in business. One great example of this are the trade surpluses that the EU has with South Korea along with concurrent the US trade deficit . Though the US inked their deal with Seoul first, it languished in Congress until 2012, by which time the EU had already capitalized on their fully functioning agreement.
In addition to the diplomatic flaws such a goal would bring, the domestic economy would be hurt in non-intuitive ways as well. For example cutting imports would raise costs for every single product which uses steel and/or aluminum. This is especially true in the short term since, as has already been stated, smelting firms take a long time to get up and running. But there are long-term costs as well. In order to remain competitive, firms that are hit with higher input prices will need to bring down costs elsewhere, such as with labor. This could mean investing in robotics. So by protecting the manufacturers of commodities, who are involved in markets that fluctuate by nature, pressure would be applied across the rest of the manufacturing sector to invest in automation, further threatening jobs President Trump is trying to protect.
One potential alternative could be a renewed focus on improving access to international markets, especially in China. US firms have long struggled and failed to gain a foothold in the mainland. The tech giants garner much attention for their struggles, but Alcoa, the Aluminum Company of America, attempted to enter China in 2001 by buying an 8% stake in Aluminium Corporation of China (Chalco); however, this controversial pronunciation. Namely, because of plummeting prices. Before 2015, most workers at refineries were not aware of the listed prices on the London Metal Exchange. However, now they are followed daily. The plummeting prices have been caused in part by Chinese subsidies and low-cost loans. Both of these policies, among other things, boosted the Chinese world market share in aluminum from 14% to 54% since its entry into the WTO in 2001. Also in line with the national security rationale, refineries take over a year to restart after shutting down. Additionally, If all of the US refiners shut down, it will be nearly impossible to negotiate with international suppliers. The defense industry itself also has requirements. For example, an aluminum plant in Hawesville, Kentucky is the last plant in America that produces aluminum at the quality demanded by the US military.
One day into the G20 summit and there has been no clear news on the issue. The EU would most likely want to work with the United States in order to protect themselves from subsidized steel imports. However, that will be difficult if their main partner in the endeavor is strangling them in the process. Like with agriculture and food security, the foundation industries of an economy can often gather the political support for protection. However, using the nuclear option for trade will probably result in mutually assured destruction.
Featured Image: G20 Hamburg by Bankenverband, Flickr Creative Commons
Andrew Cech is a Master’s candidate at the Patterson School of Diplomacy and International Commerce, majoring in International Commerce and Economics. When not climbing rocks or playing the cello, he enjoys reading the latest news over economic development, trade relations, and international agriculture.