Donald Trump has announced last week he will sign a decree creating a 25% tax on steel imports and a 10% one on aluminum imports. He hopes, in doing so, that the American production will rebound in these two sectors which he believes they are strategic, regarding the sovereignty of the country. This has triggered several passionate declarations from European leaders and some more cautious ones from China. They threat to replicate with retaliatory measures. According to his habits, the American president has passed a new step in the verbal escalation in mentioning the prospect of a trade war he has no doubts about the capacity of his country to win. Financial markets, already weakened by uncertainness regarding American economic and monetary policy, reacted very badly in Europe and in Japan.
These declarations are certainly disproportionate to the real economic stakes. U.S. trade deficit reached almost 600 billion dollars in 2017. The two targeted products, steel and aluminum, are only contributing to it for about 25 billion. Aluminum imports represent 11 billion, coming mainly from Canada (5 billion) and China (3.5 billion). Regarding steel and steel products, they reached 29 billion, coming mainly from Canada, again, Brazil and Russia. Once more, Europe did not play any role in the U.S. trade deficit regarding these two products and has not contributed to weaken these activities, considered, wrongly or not, as strategic for the security and the independence of the United States.
It is not the first time that Donald Trump declarations are arousing frights. But experience has shown that they were barely followed by effects. The wall which was supposed to be built along the Mexican border and to be financed by taxes on imports coming from the neighboring country is still waiting for the laying of the foundation stone. Threats directed toward North Korea had, fortunately, the opposite consequence of the one which was expected because South Korea has multiplied rapprochement gestures with its neighbor, without having really asked the authorization to Washington. The customs duty case is more worrying because, and that may be verified as soon as this week, the American president has the legal power to carry out his threats. His political supporters, the Republicans are split regarding this protectionist policy which surely has supporters among Democrats, but he doesn’t need, right now, the authorization of the Congress.
Donald Trump, in this circumstance, shows he is an adept of the “old economy”, like some populists movements in Europe, starting with Front national in France and the far-right Parties in Germany and in Italy. Even when his country has been at the origin of globalization, its companies, the multinationals, have been the main vehicles of it and when Wall Street and American banks are living on it, he believes that the United States could, without any damage, withdraw into itself. The choice of the concerned products is especially clumsy. The rebound of a local production will take years, to suppose that investments are realized and, especially, that the management of the related groups are convinced about the durable character of these measures, which will be necessarily challenged by the other members of the international community. But during that period, American enterprises which need steel or aluminum for their supply chains will see their costs increase and will have to pass them on their clients. Two activities, which are among the major exporters of the American industry, aeronautic and transport, will be weakened. Competition from imported products which will not be affected by these surcharges will be more intense and competitiveness regarding exports will be weakened.
Protectionism is an old-fashioned idea. Competition generated by open borders is a factor of progress, to the condition it is loyal and countries which participate to the exchanges respect a minimum of common rules. It is difficult to pretend that European countries are violating these principles and Brussels didn’t rebel against the Obama administration when it massively subsidized General Motors to prevent its bankruptcy during the sub-primes crisis. We could also take banks as examples. Regarding China, it is indisputable that the situation of state-owned industrial enterprises lacks of transparency but since the reform launched during the Eighties, American companies found there a possibility to reduce their costs and to offer to American consumers attractive products. So trade liberalization has played an essential role in the structural reduction of inflation in developed countries. But it is not all. It has also offered to consumers an almost unlimited possibility of choice among what they could buy in retail networks. Would they consider that it is a progress to lose it in the future?
This obviousness will appear quickly and as for many of his initiatives, the American president will be obliged to reverse. But during that period, it is necessary to keep an eye open to avoid that American partners don’t worsen the situation though provoking reactions which will have as a consequence to incite Donald Trump to outbid and to start a dangerous escalation. After all, the level of steel and aluminum European exports is unimportant and doesn’t justify the start of a real trade war, especially if we take into account the trade surplus European countries have with the U.S. To put a tax on Harley Davidson imports as it was suggested by European Commission chairman, Jean-Claude Juncker, is as unimportant due to the level of the amounts at stake than dangerous. Being a finished product, it would open the way to an American counterattack, for instance against the car industry, which could have heavy consequences.
China also must be aware about any excess. The country has a powerful arm: it is the most important foreign subscriber and the first owner of Treasury bonds. Any doubt about eventual measures of retaliation as the reduction of the purchase of American securities would provoke a dramatic rise of interest rates in the U.S. and could start a major international financial crisis. Chinese authorities are certainly aware of that because no creditor has interest to worsen the situation of its debtor. They also have a much better understanding of the situation than the Europeans. They know it is a provocation without major consequences because the level of steel and aluminum exports to the U.S. doesn’t justify to fall in the trap and to start an escalation.
Donald Trump is sincere when he believes that protectionism would generate benefits to America but he is heavily wrong. A trade war would inevitably lead to a financial war with much heavier consequences. It would not be only Main Street, the goods market, which would be affected but also Wall Street. His close circle has not succeeded in dissuading him to launch this rearguard fight to protect, as he believes, the American industry. Financial markets reaction, if the situation worsened after new provocations, could be even more brutal than during the previous crisis. That could convince him, since during his carrier he went bankrupt, that it would be better to turn back.