Trump's Trade War Is An Incompetent Response To A Real Problem

The mainstream critics who have attacked Trump's action make a couple of arguments that entirely miss the deeper point.
Jonathan Ernst / Reuters

President Donald Trump’s new tariff orders on steel and aluminum perfectly illustrate Trump’s feral genius for playing to popular resentment of foreigners ― and the high costs of his incompetence when it comes to the details of strategy and diplomacy. These tariffs were the wrong version of a long-overdue response to the predatory trade practices of China that are devastating American industry.

But Trump is onto something. It does matter whether the United States retains steel and aluminum industries, especially when their decline is the result of unfair trade practices by other nations. And the knee-jerk reaction to Trump’s orders shows how orthodox economists and the mainstream press refuse to grasp how trade really works, or what’s at stake. Instead, we got the usual sermon about the folly of protectionism and the risks of a general trade war.

But if you want to appreciate true protectionism, take a good look at China’s entire economic system. Steelworkers’ union president Leo Gerard put it perfectly: “Some of these idiots that say we are going to start a trade war ― well, we are in a trade war now, and we are just sitting back.”

What’s the nature of this trade war? Beijing subsidizes production, floods the world with a glut of products at prices below their true costs, blocks imports, demands trade deals with Western “partners” on terms that transfer technology and leadership to China, uses state intelligence agencies to steal intellectual property whose transfer it can’t coerce ― and then demands and gets special treatment under the WTO as a developing country! All of this grossly violates free market norms, and grabs market share in industry after industry at the expense of nations like the U.S. that mostly play by the rules.

China produces more than 800 million metric tons of steel, close to half of all the steel produced in the world. By comparison, the U.S., once the world’s leader, produces just over 70 million metric tons. Industry experts calculate that more than half of China’s steel output, about 425 million metric tons, is excess capacity.

The mainstream critics who have attacked Trump’s action make a couple of arguments that entirely miss the deeper point. For starters, they note that China only provides about 3 percent of steel imports into the U.S., so why go after Beijing? But look a little deeper. In response to past complaints that resulted in tariffs against particular categories of dumped Chinese steel, China simply increased its exports of steel to other nations, such as South Korea, for re-export. The Koreans then fabricated the steel into products like pipeline sections, which they exported to the U.S. Thus, Chinese steel evaded existing U.S. measures by detouring through other countries.

But the core of the problem remains China’s predatory excess capacity.

“He goes for the most simplistic, vivid and demagogic remedy.”

Trump’s timing may be suspicious, with a special election for a vacant House seat coming up in Pennsylvania’s steel country on March 13. But Trump did not just pull these tariffs out his ear. A voluminous technical report by the Commerce Department, made public Jan. 11, found that relentless increases in import penetration had reduced U.S. steel production to below 70 percent of capacity, “a non-financially viable and unsustainable level of operation.”

In a public statement Feb. 16, Commerce Secretary Wilbur Ross proposed several possible options. One was an across-the-board increase in steel and aluminum tariffs. The second was a targeted tariff increase complemented by targeted quotas aimed at nations that were the source of the problem, most notably China. The third was a quota system generally.

Trump, being Trump, went for the most simplistic, sensationalist and headline-grabbing move ― tariffs on all steel imports. This was hardly a surprise.

Back in August, Axios published a leaked summary of a meeting between Trump and his senior trade advisers. At that meeting, Trump declared, “I want tariffs.” Trump’s top economic adviser, Gary Cohn, previously of Goldman Sachs, was plainly unhappy. Trump ended the meeting by declaring to White House Chief of Staff John Kelly: “I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don’t want them, John, they don’t want the tariffs. But I’m telling you, I want tariffs.”

So was Trump’s move smart or dumb? Basically, it was a dumb variant of a long overdue policy. Trump adviser Peter Navarro was right on Fox News on Sunday when he referred to China as the deeper source of these gluts. “It doesn’t matter who is sending us this product, the fact is that if we keep receiving it the way we have, we are not going to have an aluminum industry,” he said.

The fact that the mainstream has been ducking the reality of China’s state
capitalism and its effect on U.S. industry leaves the field to far-right ultra-
nationalists like Navarro and Trump, who are inclined to use a blunderbuss
approach that alienates allies as well as adversaries.

For decades, Republican and Democratic presidents alike have waltzed around the deeper challenge that Chinese state capitalism poses, both to the global trading system and to America’s place in it. Intermittently, the West has imposed selective anti-dumping duties against the Chinese, but has not challenged the predatory logic of the entire Chinese mercantilist system.

In part, this reticence is due to the fact that key players in America’s economic elite have figured out ways to profit from relations with a predatory China, even though Beijing is stealing their clothes in the long run. (Like climate change, that long run has arrived abruptly.) Apple loves the fact that it can make its products in China, using a well-trained, cheap and docile work force one cut above slave labor. Goldman Sachs makes a fortune brokering financial deals with the Chinese.

Usually, the influence of these players is sufficient to keep American presidents from taking too hard a line against Beijing. So China treats the occasional get-tough order as a bee sting.

Under Trump, however, the internal White House politics changed. The top officials dealing with trade policy, for once, are hard-liners: Commerce Secretary Ross, a former private equity billionaire who knows the steel industry well; U.S. Trade Representative Robert Lighthizer, who has a long history as a tough negotiator; and senior economic adviser Navarro. Backstopping these three among senior White House staff is Stephen Miller, who reinforces Trump’s impulse to pander to economic ultra-nationalism.

In the internal staff discussions on the steel issue, this group of hard-liners won and the Goldman Sachs alums, Gary Cohn and Treasury Secretary Steve Mnuchin, lost. But the sheer simple-mindedness of Trump’s move to impose flat tariffs on all steel exporters stunned even the trade hawks.

If the main problem is China, why retaliate against Canada, which actually buys more steel from the U.S. than it sells? Why attack the European Union, whose close cooperation America needs if we are to have a general strategy of seriously challenging Chinese mercantilism?

The EU, in fact, has its own history of levying tariffs against Chinese exports, including a 28.5 percent tariff imposed last year against pipes and tubes exported at prices below the cost of production. But Trump, in a stroke, managed to get Canada, the EU and China all on the same side.

But that is Trump. He goes for the most simplistic, vivid and demagogic remedy. Pressured on all sides, he may yet walk back the details of his order, so that it targets the true offenders, namely China, and certainly not Canada or the EU.

American trade policy has long been hobbled by ideological blinders, compounded by wishful thinking about China’s evolution into a free market democracy. But in the quest for a drastically different trade policy, Trump is about the last leader who would change course competently or constructively.

A serious trade policy would go after the root of China’s state capitalism, enlisting every possible ally rather than alienating them. It would connect trade objectives to the revival of U.S. manufacturing across the board, supercharged by an infrastructure program that favored domestic producers.

Raising tariffs on state-subsidized steel is a good and necessary part of the right policy. But Trump’s version, at least so far, has energized his critics and united America’s adversaries.

Robert Kuttner is co-editor of The American Prospect and a professor at Brandeis University’s Heller School. His forthcoming book is Can Democracy Survive Global Capitalism? You can follow him on Facebook and Twitter.

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