Now is the Chance for Biden to Reverse One of the Most Disputed Trade Initiatives in Recent Decades
President Trump at the signing of the Phase One Trade Deal between the United States and China. Photo by Trump White House Archived.
Eighty-one years ago, Senator Reed Smoot (R-UT) and Representative Willis C. Hawley (R-OR) saw a United States that was succumbing to the pressure of foreign trade competition. Their principal focus was on farming. Smoot and Hawley maintained that tariffs would bolster the competitiveness of the agriculture sector by weakening the demand for cheap foreign products. However, what began as an effort to protect domestic farmers soon engulfed hundreds of non-agricultural sectors. Instead of strengthening the domestic economy, the Smoot-Hawley tariff lowered the purchasing power of American consumers, compelled trade partners to retaliate in kind with customs against U.S. products, and forced global trade down by 65%. While tariffs tend to benefit a few domestic sectors, economists generally agree that free trade in a global market is ideal. The Smoot-Hawley tariff is observed by advocates of free trade as an example of the perils of increasing tariffs on imported goods.
In 2018, former President Donald Trump applied a similar protectionist stance by passing a 25% tariff on steel and a 10% tariff on aluminum. President Joe Biden’s first 100 days in office represented a sharp economic departure from his predecessor, though he has yet to amend what has become one of the most disputed trade initiatives since Smoot-Hawley. While the United States and the European Union agreed to a temporary tariff truce on May 17, 2021, the truce has hardly addressed the totality of Trump’s initiative, and has left U.S. steel tariffs and E.U. retaliatory tariffs in place. This is strange considering the Democratic Party has a general propensity to support free trade. Likewise, Biden’s economic plan has emphasized policy pivots away from Trump’s initiatives, which isolated allies by acting unilaterally and erecting trade barriers. The maintenance of the metal tariffs effectively retains those very policies that Biden sought to challenge and embodies a similar logic that initially sparked the Smoot-Hawley proposal. As Adam S. Posen argued, there is a price to pay for economic nostalgia.
A Self-Defeating Retreat
On the one hand, the metal tariffs are addressing global overcapacity of steel that floods U.S. markets with cheap imports. Unsurprisingly then, the tariffs benefited some import-competing industries, that is, industries that compete against foreign goods in the domestic economy, including creating several thousand jobs in the steel industry as a result of reduced foreign imports.
On the other hand, the cost of steel tariffs have been almost entirely shouldered by American households, which collectively lost about $1.5 billion in the wake of increasing consumer prices brought about by higher costs of metal. Meanwhile, other U.S. manufacturers became less competitive in both domestic and foreign markets due to higher input costs and lower exports, resulting in a loss of 75,000 manufacturing jobs and over 100,000 manufacturers filing requests for aid.
Restabilizing steel and downstream industries, such as automotive and appliance industries, will be a challenge for the Biden administration. That challenge might turn out to be less taxing than reconfiguring unwoven relations with key allies, including Japan, South Korea, the United Kingdom, and Canada. The latter two responded to Trump’s unilateral tariffs with significant customs duties of their own. As European Union officials are seeking a swift removal of tariffs on E.U. metals, U.S. steel industry groups are advocating with increasing urgency for the preservation of Section 232 of the Trade Expansion Act, which allowed Trump to authorize these tariffs under the auspices of national security. These European countries are both important trading partners for the U.S. at the outset of an economic recovery, and are key to addressing continuing Chinese trade distortions that have shaped U.S.-China relations over the past decade.
Custom duties as aggressive as these have been tested numerous times throughout history. To date, there has not been a single country that has enjoyed sustainable economic growth as a result of increasing tariffs一and the 2018 tariffs are shaping out to be another example of a failed protectionist policy. Yet the use of tariffs persists, and the Biden administration, like the Trump administration, sees something promising in this initiative.
The original goals of the tariffs were threefold: (1) to aid and protect American workers, particularly manufacturing workers, (2) to leverage their implementation to renegotiate unfavorable trade agreements for the U.S., and (3) to protect national security. The U.S. did make some inroads in these three sectors. But the economic damages and political ramifications of strained alliances offsets any gains made in steel manufacturing.
The common denominator between these goals is that of global overcapacity of steel. A more robust plan would negotiate a global settlement on the issue of steel overcapacity through the World Trade Organization. Such a strategy would have a better opportunity to meet the failed goals of the metal tariffs without harming other domestic sectors or placing a wedge between America and its strategic economic and geopolitical partners.
The Limits of Security
Congress enacted Section 232 of the Trade Expansion Act during the Cold War, when national security issues dominated the debate stage. Under Section 232, former President Trump was empowered to adjust imports if he felt America’s national security was threatened. The global overcapacity of steel was thought to endanger military operations and critical transportation, which was partially backed by Secretary of Commerce Wilbur Ross’ 2018 investigation that reported a substantial decline in U.S. steel and aluminum production in the years leading up to the tariffs. This put into question America’s state of wartime preparation. However, the metal tariffs targeting imports from U.S. allies prompted not only Democrats, but Republicans who back principles of free trade to question the legitimacy of this application of Section 232.
It is clear today that metal customs did not improve American national security. In fact, the tariffs antagonized key allies, the timing of which could not be worse. Breaking up important solidarity obstructs effective competition with China in high-tech innovation. The United States and many of its allies share a range of concerns about China’s technological ambitions challenging national security, particularly in the maritime realm as Chinese air and naval forces continue aggressive maneuvers throughout the Indo-Pacific using cyber strategies.
Getting our Home in Order
Tariffs were enacted not just to protect steel industries, but to propel them. Many reports analyzing whether this has occurred have treated steel industrial growth as an isolated case when it should be contextualized by cross-industrial data. For one, many steel producers did enjoy the creation of new jobs, which pays comparatively well, with men and women earning 27% and 58% more than the median American worker, respectively. In addition, the top five U.S. steel companies doubled their annual investments in new or upgraded steel facilities that will see increased usages of environmentally-cleaner and more efficient crude steel. In comparison to most of the world’s major steel producers, such as China, the chronic oversupply of steel is compounded by hazardous blast-furnace-based production, which is incredibly damaging to the environment.
As with every economic initiative, there are always losers. In this case, two particular groups suffered. First, U.S. workers employed in sectors dependent on steel inputs, such as the automotive and construction industries, experienced a rise in unemployment. Second, export-oriented sectors likewise experienced a dent in production and subsequent layoffs of workers. In their case, the unilateral enforcement of tariffs aggravated many American trading partners, which encouraged those countries to enact their own retaliatory tariffs on U.S. imports.
In general, some sectors are indeed benefiting from the metal tariffs, with possible positive outlooks on more environmentally-cautious production in the future. But that improvement does not diminish the inherent strain that steel production places on the environment. Recall that the cost of steel tariffs have been almost entirely borne on American households, which lost about $900,000 for every job created in the steel industry. That paired with more job loss than creation makes the overall impact of the tariffs a loss for American workers.
The Essence of Negotiations
The Trump administration believed the tariffs could be used as important leverage to secure favorable trade agreements. While the tariffs captured the attention of negotiators, the importance of maintaining a stable and reliable posture to arrange advantageous agreements was jeopardized by the swift, unilateral resort to tariffs.
In the case of the U.S.-Mexico-Canada Agreement and the so-called “Phase One” China deal, both the application of tariffs and the threat of enacting future tariffs did offer U.S. officials the leverage they needed to secure an agreement. While the assumption that using tariffs to improve America’s bargaining position would be applicable for the steel and aluminum industries, the extremity of the metal tariffs rendered this hope essentially moot. Establishing a durable symbiotic trade relationship is unlikely under unbalanced circumstances. While Biden’s economic approach differs significantly from his predecessor, not taking the initiative to conclude, or at the very least reduce, the tariffs sends a signal of an unreliable trading partner and threatens prospective trade agreements. The recent negotiation with the E.U. is a start, but that small step took almost five months to be put in motion.
The World Trade Organization
Effectively addressing these issues requires a two-pronged approach. First, the tariffs on steel and aluminum should be eliminated. Second, the Biden administration should attempt a ‘reset’ by establishing an agreement to mutually-terminate tariffs through the WTO specifically addressing China and the E.U. The institutional setting of the WTO holds member states accountable for disobedience by widening the prospects of retaliation should any participant act with malign intent. Bound to norms and standards, this agreement would allow for positive benign competition, better management of escalations that could lead to a resurgent trade war, and promotion of multilateralism, which was an important component missing in the unilateral tariffs that resulted in retaliatory behavior.
Two important counters arrive. First, the administration would face disapproval from the U.S. steel industry at the onset of tariff reductions. Domestic companies will face cheaper imports, which will harm their income prospects and lead to job losses. This will likely invoke a pro-nationalist argument emphasizing the importance of protecting domestic industries against cheap foreign imports. However, the overall net gain outweighs the repercussions. Companies that rely on imported factors of production and those in export-oriented sectors would benefit greatly from a decrease in tariffs. Prices for the American consumer would stabilize. And it would create a healthier global market by re-securing steel revenues garnered by U.S. allies, which shouldered about half of the cost of American steel tariffs. Correcting an uncertain market, in turn, should increase investment in manufacturing.
Second, at the international level, some would argue that the U.S. cannot trust a commitment by the E.U. and China to mutually lower their tariffs. This raises the issue of threat credibility: would the prospects of the U.S. retaliating against malignant behavior be persuasive enough to prevent the E.U. and China from increasing their tariffs? Commitment and trust are two inherent flaws in an anarchic system that lacks a superior authority to enforce agreements and resolve disputes. Seeing as the ensuing trade war between the U.S. and China has escalated to such an extent as to affect important markets in both countries and across Europe, it would be in the economic interest of each participant to find and maintain an agreement on tariff reductions. Because each region is relatively large and comparatively developed, opportunity costs for closure are small, meaning that increased openness would be politically-beneficial for each participant. Still, it will be a challenge to decrease the length and severity of the initial economic shock to the domestic steel industry without antagonizing key international actors or harming the credibility of America’s commitment to fair steel practices.
Both the initial economic shock faced by the domestic steel industry and commitment uncertainty would be remedied by addressing steel overcapacity. Aside from 2020, state-backed mills have flooded the market with an overabundance of cheap and environmentally-harmful steel, of which U.S. steel producers cannot effectively compete against. While China’s role is considerable here, several other countries whose industries are supported by the state through subsidies and other trade distortions likewise contribute to overproduction.The chronic over-supply places U.S. steel production at risk, and with it thousands of direct and downstream jobs.
Using the institutional setting of the WTO is necessary to meet overcapacity at scale. Through welcoming a multilateral effort to reduce global steel supply, countries can recognize and promote market advantages, such as the U.S. exporting soybeans and China exporting electronics. Linking these concepts together─reducing steel supply and enhancing access to foreign markets through promoting comparative advantage─incentivizes leaders to reach a concession due to the possibility of multi-sector growth, particularly benefiting those in the export-oriented industries. Additionally, overcapacity also produces large amounts of pollution. Framing the issue of over-production as an environmental-hazard would place additive pressure to reach an agreement while cushioning possible backlash from major exporting countries.
The Biden administration would initially face resistance from major steel-exporting countries. Though, forging a multilateral agreement and ending the use of Section 232 would effectively decrease the chances that a foreign country would take the U.S. to court over unfair practices, given agreements would be made collectively and would eliminate the vexed use of national security to erect tariffs. This would further aid the efforts to end a trade war, of which has seen economic hindrances ripple throughout several non-steel industries at home and abroad. If the U.S. were to fail to make concessions regarding global steel production, it would strain any effort to rectify critical alliances and blueprint sustainable recovery from the 2020 economic downturn.
The Price of Nostalgia
In 2002, George W. Bush tried to protect the steel industry by levying tariffs up to 30% on selected steel products. Barack Obama likewise imposed high tariffs on steel in an effort to curtail Chinese imports, particularly in the automotive industry. In both cases, the initiatives failed. American consumers shouldered much of the burden due to increased prices and foreign allies retaliated with custom duties of their own. Bush, Obama, Trump, and Biden’s worries about the prosperity of the domestic steel industry amid high levels of global overcapacity are valid. But the repeated failures and their creation of the same economic consequences shows a need for a new perspective on the issue of steel overcapacity.
The tariff proposal was created to protect American steel companies. Instead, it decreased American jobs and placed the U.S. at odds with many important allies. America must capitalize on its negotiations with the E.U. and replicate them on a grander scale. While imperfect, using the institutional setting of the World Trade Organization to address overcapacity might provide that new perspective by encouraging cooperation and decreasing the prospects of retaliation that plagued each attempt to protect the steel industry in past administrations. Discontinuing the tariffs and negotiating a new treaty seeking a global reduction in steel overcapacity while emphasizing multi-sector growth would ready participants for increased capital investment, employment, and sustainable growth. Moreover, analyses on overcapacity have tended to hone in on China’s role. While their part is considerable, leaving absent a discussion on other countries’ roles in producing chronic oversupply of steel, including the E.U., India, Brazil, and Turkey, avoids the heart of the problem: the scale and multinational incentives of increasing steel production. Instead of working on an ad hoc fashion constructing bilateral agreements, using a platform that invites key players to the discussion forum in an open setting allowing for international pressure to make a concession might prove advantageous for this large and complex issue.
A strong domestic steel industry is the foundation of national defense, competitive manufacturing industries, and critical infrastructure. Its maintenance requires a pivot away from conventional methods. The price paid for increasing tariffs occurred under Smoot and Hawley, Bush, Obama, and Trump, but it does not have to continue under Biden. Now is Biden’s chance to differentiate himself from his predecessors by taking a new approach to steel overcapacity and reversing economic grievances. There is a price to pay for economic nostalgia, and the United States is already financing the cost.
Taylor Fairless graduated summa cum laude from UCLA in June 2021 with a major in History and minor in Global Studies. She is interning at the Department of Defense and hopes for a career in international security and arms control.
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