The Trump Metal Tariffs: Pulling Out a Baseball Bat When We Need a Scalpel

March 2, 2018

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

President Trump announced tariffs this week on all imported steel (25 percent) and aluminum (10 percent), regardless of country of origin. Not surprisingly, the Washington trade establishment rose up en masse to decry the actions, as they do with all tariffs.

But not all tariffs are created equal. The real problem is not that Trump imposed tariffs; it is that he appears to have be motivated purely by a protectionist instinct, not because he recognized a legitimate need to aggressively confront foreign mercantilism, particularly on the part of the world’s worst offender, China.

The Washington trade establishment seems incapable of making this distinction. They decry as “protectionist” any effort to retaliate against foreign unfair trade practices, unless the move comes in the form of a WTO case, and even often oppose it. They refuse to take even the mildest of shots that might lead to a “trade war,” even though we have been in one with China for more 15 years, and they have fired virtually all of the shots.

But as ITIF has long argued, fighting foreign mercantilism, including by means of “protectionist” tactics, is not protectionism as long as it is targeted squarely at foreign mercantilist policies that subvert the norms of global trade and is quickly removed when the offending policies are removed. ITIF also has long argued that not all mercantilist threats are the same. China’s actions are in a league of their own and represent the single greatest threat not only to the integrity of the global trading system but also to the U.S. innovation economy. In addition, not all industries are the same, despite what the Washington trade establishment tells us. Computer chips are more important than potato chips. Semiconductors are more important than steel. In this sense, it is critical that U.S. anti-mercantilist efforts focus on the worst offenders, especially China, and the policies affecting the most important industries for America’s future: advanced-technology industries such as information and communications technologies, aerospace, life-sciences, and others.

It is in this context that the Trump tariff announcement is so troubling. There are at least five major problems with it:

  1. There is no justification for putting tariffs on metal imports from Canada, Europe, or other free-trading allies. These nations generally don’t engage in metal mercantilism, such as production subsidies. If Trump wants to go after the real cause of global overcapacity in these industries, he should target China for the massive subsidies that are part of the innovation mercantilist policies which lie at the heart of China’s model of state-led capitalism and which have been the central force driving overcapacity in these and other industries. In fact, since China joined the WTO in 2001, subsidies have financed 20 percent of China’s manufacturing capacity annually. Canada, Europe, or other free-trading also are our allies—if we ever got to the point of needing these metals for national defense, they would provide them.
  2. They focus on the wrong industries. The key trade battles are for the advanced industries of the future. Steel and aluminum do not qualify. If the administration is truly worried about key defense technologies, it should focus on industries like semiconductors, lasers, artificial intelligence software, autonomous systems, and aerospace—all industries/technologies China has targeted for global dominance. (In fact, there’s not a single advanced-technology industry that China has not targeted for dominance.) This does not mean we should put tariffs on these products—in fact, that would be harmful to U.S. innovation, as many them, especially ICT products, drive U.S. productivity. But it does mean we should structure an offensive attack against innovation mercantilism that hurts these and related industries.
  3. They encourage foreign tit-for-tat protectionism. Indeed, less than 24 hours after the president’s announcement, Europe had already released its list of industries on which they would apply retaliatory tariffs. Other nations are sure to follow.
  4. They alienate our allies in what must be a joint battle against China. As ITIF has written, the trade war of our era is with China, and the odds of winning that war are not high unless the United States forms a deep alliance with other free-trading, democratic partners, including Europe, Japan, South Korea, and the Commonwealth nations. To be sure, the United States needs to lead this battle, but unless it goes into the fight with “trade troops” from our partners, China will be free to continue engaging in “rope-a-dope,” playing its opponents against each other. Slapping indiscriminate tariffs on our free-trading allies is a sure way to enter the contest isolated.
  5. It reduces America’s moral high ground for pushing for a global free-trade regime. Ever since Bretton Woods, the United States has led the world in calling for deeper global integration and free, market-based trade. To be sure, after President Reagan, the trade establishment and successive administrations have largely ignored the notion that saving the soul of the global trading system required an offensive approach to mercantilist enforcement, and not just urging everyone to sign more free trade agreements, many of which trading partners like China, Vietnam, and others quickly ignored once the ink was dry. Indeed, if past administrations had not been so influenced by the Washington trade establishment and had instead taken strong anti-mercantilist steps, we wouldn’t find ourselves in this situation. Nonetheless, the response to a lack of anti-mercantilism cannot be protectionism for the sake of protectionism. Going down this path will not solve foreign mercantilism; it will only make it worse.