Why Donald Trump's move on tariffs may spark global trade war

Monday, 5 March 2018

Although his recently announced measures cover only steel and aluminium, US President Donald Trump has be strongly anti-China, made threats aimed at the European Union and claiming that trade wars are 'good'.

For months trade officials have been warning about growing trade protectionism across the globe. Recent moves in the United States have led to warnings that the world is heading for a trade war.

What has sparked the concern?

The US relationship was already strained because of comments by Donald Trump. Now Mexico, which exports large amounts of steel to the United States, has warned it may retaliate against the tariffs.

On Friday (NZ time), US President Donald Trump announced that the United States would impose a 25 per cent tariff on imported steel and 10 per cent on aluminium, with claims that the tariffs could be in place within days.

Stock markets in the United States and around the world dropped sharply on fears that a trend towards trade barriers could escalate into a trade war, where countries begin a process of imposing tariffs in favoured industries.

ExportNZ executive director Catherine Beard has warned the biggest impact for the steel and aluminium sectors may not be in the US, but on the global market.

The Tiwai Aluminium Smelter front right, near Bluff. While only a small fraction of New Zealand's aluminium exports go to the United States, there are concerns that measures announced by President Donald Trump could depress global prices.

* World recoils over Trump tariffs on steel, aluminium**

* Trade wars lead to rising global tension, says Trade Minister David Parker

Officials from the European Union, Canada, Mexico, China, Japan and Brazil have all said they are considering retaliatory steps.

What led to Thursday's move?

Donald Trump campaigned on a vague promise to 'make America great again', but some of his pledges were more specific. This included repeated promises to save industries which had suffered at the hands of globalisation.

'When I'm president, guess what, steel is coming back,' Trump told a rally in Pittsburgh in Pennsylvania, one of the former powerhouses of global steel production.

The state had backed Democrat presidential candidates in six straight elections, but like a number of other surprises, opted for Trump in 2016.

While markets were caught offside by his recent announcement, Trump was simply carrying out a campaign promise which he had repeated since entering the White House.

Like everything else he says, no one is certain whether he will follow through, but on this occasion trade officials are acting as though the tariffs will be in place within days.

Is this just about steel and aluminium?

If only. While the specific measures announced by Trump appear to be limited for now, his rhetoric was anti-China, and included direct threats to the European Union.

Read Trump's comments when he announced the tariffs, and consider that China accounts for around 1 per cent of US steel imports which would be covered by the tariffs.

'The WTO has been a disaster for this country, for our country, in fact, the rise of China economically, if you look at it, was directly equal to the date of the opening of the World Trade Organisation,' Trump said as he announced the tariffs.

'It [the WTO] has been great for China and terrible for the United States and great for other countries but terrible for the United States.'

Later, Trump said on Twitter said that 'trade wars are good, and easy to win'.

This was followed by warnings of direct action against other countries. 'We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as [other countries] charge us.'

Trade expert and former diplomat Charles Finny said the moves would be 'horrendously in breach of WTO rules'.

What will be the impact on New Zealand of the measures?

Although the plants are both foreign-owned, New Zealand manufactures both steel (Glenbrook) and aluminium (Tiwai). The aluminium smelter near Bluff is a major part of the Southland economy as well as being the largest user of electricity in New Zealand.

A spokesman for Trade Minister David Parker said New Zealand's iron and steel exports to the US were worth $39 million last year out of a total of $433m, while aluminium exports were worth $23m out of a total of $1.1 billion.

But exports to the US may be a minor part of the problem for the two sectors.

Catherine Beard, executive director for ExportNZ, said the bigger impact was likely to be felt outside the US.

'What both of those sectors will be concerned about is what it does for global supply,' Beard said.

The countries which currently export to the United States may be forced to look elsewhere to reduce the price cut they would face, depressing prices globally.

'If China's looking for a new home for steel, because there's already been concerns expressed domestically that they come into New Zealand with, you know, cheap steel. That would be a concern, and for aluminium as well, what does it do for world markets.'

What if the tariffs spread?

According to the Ministry of Foreign Affairs and Trade, New Zealand exported $8b worth of goods and services to the United States in 2016.

Beard said in ExportNZ's recent surveys, many companies were reporting that as a market the United States was showing strong growth.

'Any move towards tariffs on our biggest export sector, which is the agri-exports, would be a huge problem for New Zealand. It's a good market, there's a lot of well-paid people who like what we produce.'

Is the problem spreading already?

Parker said quite aside from the US moves on steel and aluminium, there was already a trend towards global protectionism.

'Even before this [US episode], my officials were advising me that there were tens of thousands of non-tariff barriers that are slowly being implemented in different countries around the world, so that trend is clear.'

Finny, a former ambassador to China who led negotiations for the Taiwan free trade deal, said the situation was growing against a backdrop of 'growing dysfunctionality' in the WTO, the main arbiter of global trade, with the United States blocking new appointments to the body's appellate body.

'The whole dispute settlement system is now under increasing pressure and if nothing is done about it, by the middle of next year, that will grind to a halt.'

Beard said the prospect was concerning for New Zealand.

'That's where you get your free trade deals enforced. That's the body that makes judgments on who's breaking the rules that you essentially agreed to in your free trade agreements.

'That would be a huge concern for everybody in world trade circles and particularly for small countries where we don't have any other way to enforce deals other than to go through that international body.'

What can New Zealand do?

Parker has already ruled out any form of retaliation, promising instead to continue to talk up the benefits of global trade, pointing to the record numbers of people being pulled out of poverty across the globe since 1945, and the relative peacefulness of the globe during the postwar period.

'We will be taking a moderate line'

Finny said New Zealand could consider joining an appeal against the US moves in the WTO, although it would remain to be seen how many countries would be prepared to act.

Parker departs for Chile to sign the CPTPP in Santiago this week, and is using the US episode to show the importance of the agreement, which at one point appeared set to see the Labour Party end its support for free trade deals.

'It just reinforces the importance of us having other bilateral or plurilateral trade relationships that enable us to have arrangements with other countries where we can't be treated like this.'