President Donald Trump’s decision to move forward with tariffs of 25 percent on imported steel and 10 percent on imported aluminum has drawn comparisons to the steel tariffs President George W. Bush levied in 2002, which were widely panned as ineffective. As the Trump administration implements its own futile protectionist scheme, it is important to understand why these tariffs likely would inflict even more pain on American consumers than Bush’s did.
President Bush’s tariffs on imported steel were imposed under Section 201 of the Trade Act of 1974. Section 201 tariffs, also known as “safeguards,” can be invoked when a surge of imports threatens to injure a domestic industry. Safeguards are temporary, do not apply to individual countries and the levy usually declines over time. Safeguards were recently imposed by the Trump administration on imported washing machines and solar products.
By contrast, Trump’s steel and aluminum tariffs will be implemented under Section 232 of the Trade Expansion Act of 1962. Section 232 authorizes the U.S. Commerce Department to investigate whether imports of a particular item pose a threat “to the national security.” If the department finds that they do, the president has 90 days to propose a remedy, with wide latitude for what that remedy might entail. Unlike safeguards, tariffs issued under Section 232 are not temporary and do not decline over time.
Safeguards are widely used internationally under rules recognized by the World Trade Organization, which also adjudicates disputes on their fairness. China, Japan and the European Union successfully challenged the 2002 steel safeguards at the WTO and the Bush administration withdrew the tariffs after only about 18 months.
The General Agreement on Tariffs and Trade, the precursor to the WTO, provides for a national security exemption, which was created at the United States’ insistence. Codified in Article XXI, the exemption is extremely broad and widely considered “self-judging” – that is, the WTO’s Dispute Settlement Body is exceedingly unlikely to strike down a country’s claim that the import of some item threatens their national security. Invocations of the national security exemption by member-nations have been challenged a handful of times, but there has never been a binding GATT or WTO decision against them.
For these reasons, many legal scholars believe the national security exemption is the single most powerful exception to international trade rules. Thankfully, the authority has been invoked only sparingly and generally in good faith over the past 70 years. As the world’s largest and most important economy, and as the architect of the national security exemption, the United States has a special responsibility to invoke Article XXI judiciously. A haphazard invocation made on weak grounds could jeopardize the rules-based global trading system and open the door to similar claims by other nations.
The Trump administration now threatens to upend that delicate balance, as the national security case to restrict steel imports is particularly thin. The largest U.S. suppliers of steel are allies and the nation has a number of agreements that require other countries to provide supplies in case of a true emergency. In a letter from Defense Secretary James Mattis to Commerce Secretary Wilbur Ross, the Pentagon chief noted that the department “does not believe that the findings in the [Section 232 report] impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.” Mattis further urged restraint in imposing tariffs, so as not to damage relationships with key allies.
The data vary, but it’s clear the Bush steel tariffs sparked significant job losses, particularly in steel-consuming industries. This is important, because workers in those industries vastly outnumber steel-mill workers. Gary Hufbauer of the Peterson Institute for International Economics estimated about 3,500 steel-industry jobs were preserved by the 2002 tariffs, but 12,000 to 43,000 jobs were lost. According to the Trade Partnership, an economic consulting firm, about 200,000 jobs and $4 billion in wages were lost due to high steel prices. One author of that study pegged the number of jobs lost due directly to the steel tariffs at 60,000.
More recently, the Trade Partnership projected President Trump’s steel and aluminum tariffs will reduce net employment by nearly 146,000 jobs. Employment in the steel and aluminum sectors would rise by 33,464 jobs, but at the cost of 179,334 jobs throughout the rest of the economy. Two-thirds of the job losses would affect low-skilled and production workers. And these projections don’t include any of the effects from foreign retaliation against American exports, which already have been threatened for items ranging from bourbon to Harley Davidsons.
The Forest for the Trees
Bush’s steel tariffs came in concert with his administration’s work to secure Trade Promotion Authority, which passed in 2002 by narrow margins. The TPA was then used to negotiate various free-trade agreements, most notably the Dominican Republic-Central America Free Trade Agreement (CAFTA). In other words, Bush accepted some protectionist steel measures to serve the broader goal of trade liberalization. This wasn’t a unique phenomenon. President Ronald Reagan countenanced certain protectionist measures with a commitment to broader trade liberalization, including laying the foundation for the Uruguay Round and the North American Free Trade Agreement (NAFTA).
That is not the case today. Trump has professed hostility to trade liberalization since the 1980s and his actions in office have matched his rhetoric. The United States backed out of the Trans-Pacific Partnership (TPP) and the administration has threatened to pull out of the U.S.-South Korea Free Trade Agreement (KORUS) and the WTO. It continues to threaten to withdraw from NAFTA while renegotiating the pact with unreasonable demands on automotive rules-of-origin and a sunset clause. Unless the president’s statement at Davos regarding the United States potentially rejoining the TPP comes to fruition, it’s hard to see how today’s steel and aluminum protectionism could serve the broader goal of trade liberalization.
The costs of protectionism are well-known – a loss of economic freedom; higher prices for consumers and businesses; foreign retaliation against exports; job losses; and declines in productivity and output. We can expect all of the above from the steel and aluminum tariffs. The Bush administration’s foray into steel protectionism failed spectacularly, but the toll the Trump tariffs will exact will likely be even worse.
Image by Joseph Sohm