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Trump’s steel tariffs: How to avoid a trade war

Europe should avoid over-reacting to US announcements on aluminium and steel tariffs

By: EBR - Posted: Tuesday, March 06, 2018

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The first one would be to retaliate directly against US exports on certain goods, such as bourbon, oranges or motorcycles. These measures would have the obvious problem of hurting European consumers. Also, the WTO legal basis for such measures is difficult to find.
The first one would be to retaliate directly against US exports on certain goods, such as bourbon, oranges or motorcycles. These measures would have the obvious problem of hurting European consumers. Also, the WTO legal basis for such measures is difficult to find.

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by Christofer Fjellner*

The announcement of US President Donald Trump to introduce broad tariffs of 25% on steel and 10% on aluminium quoting “national security” concerns will have large damaging effects on the American economy.

But they are also a threat to the global rules-based trading system. As soon as the announcement came, people in Europe started to call for EU retaliatory measures and safeguards to protect EU industries affected by shifts in world market prices.

That might be a dangerous path. Instead, the EU should keep calm and not engage in a tit-for-tat trade war. Such a trade war will hurt more European jobs than already threatened by Mr. Trump’s protectionism.

While protectionist decisions always hurt the economy, these ones have the possibility of being more devastating than normally.

First, tariffs for steel and aluminium are a very bad way to avoid perceived threats to jobs. Why? These are very capital intensive industries.

Second, steel and aluminium are critical input goods in a range of downstream industries, such as cars and machinery. These are also exporting industries. Raising input prices will put these industries at a competitive disadvantage.

Third, the United States is introducing these measures using the security exceptions in the WTO that are rarely used because the basis is very wide. The latest example of the first two effects is the broad steel safeguard tariffs introduced in 2002 by then US president Bush. Those tariffs led to 200 000 lost jobs in the US, more than the total number of jobs in the US steel industry.

There are two responses to the US measures being discussed at the moment.

The first one would be to retaliate directly against US exports on certain goods, such as bourbon, oranges or motorcycles. These measures would have the obvious problem of hurting European consumers. Also, the WTO legal basis for such measures is difficult to find. 

When confronted with blatant US misuse of WTO provisions, the EU must in its response show that we remain a defender of the rules-based trading system in the WTO. If any such response is taken, it should be proportionate, almost symbolic, and tailor-made to put pressure on US politicians to remove these new protectionist barriers.

The other response would be for the EU to introduce our own safeguards on steel and aluminium products as a consequence of products originally aimed for consumption in the US now being redirected to Europe. The problem with such a response would be that European companies of these input goods would also face higher input prices. 

It’s also important to note that European steel and aluminium producers are already protected by 28 different anti-dumping and countervailing measures. Drastically increasing EU duties would entail missing the possibility of European exporting companies getting a comparative advantage to American competitors and proving that broad steel and aluminium tariffs are bad for the economy.

Closing the EU market for steel and aluminium is in fact exactly the response the protectionists in the United States, such as Commerce Secretary Wilbur Ross, would like to see. We must not be fooled by the harsh US decision into going down our own path of protectionism. 

Earlier, when President Trump in a protectionist move pulled out of the TPP, the EU responded by engaging in and accelerating free trade talks with the countries around the Pacific. Today the response must be the same. We must prove by our own actions that free trade will benefit our economy.

What we should do however is to challenge the US measures in the WTO dispute settlement. Measures based on the security exception are very rare because members have traditionally wanted to keep the exception to when actually justified. So case law on the matter is very limited. 

Now the US is obviously abusing the security exception as US defence only needs steel corresponding to three percent of US production. It will be necessary to get clarification so that Trump’s decision won’t become a precedent for countries to engage in blatant protectionism claiming the security exception.

This will be a critical time. The US Smoot-Hawley tariffs in 1930 led to many other countries raising their own tariffs and radically made the Great Depression worse. If the EU and other major trading nations engage in disproportionate responses, we risk going down the path of a trade war. The problem with a trade war is, as everyone should know, that nobody ever wins.

*Swedish MEP for the centre-right European People’s Party (EPP). He is EPP group coordinator in the European Parliament’s International Trade Committee (INTA)
**First published in Euractiv.com

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