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U.S. President Donald Trump announced Thursday that the United States will impose tariffs of 25% on steel imports and 10% on imported aluminum during a meeting at the White House.   © Reuters
The Trump effect

US tariffs threaten to upend the free trade order

'Trade wars are good' Trump says as China and Europe prepare countermeasures

TAKESHI KAWANAMI, Nikkei staff writer | China

WASHINGTON -- After announcing steel and aluminum tariffs, challenging the free trade framework, U.S. President Donald Trump doubled down on Friday by tweeting that trade wars are good.

When a country is "losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win," the president wrote. 

Trump's defiant stance raises fears of an outright trade war. China and Europe have expressed the need to prepare countermeasures. 

At a meeting with industry representatives Thursday, Trump said he would impose a 25% duty on steel and a 10% levy on aluminum, promising to officially sign the measures next week.

"A couple of months ago, we put tariffs on washing machines coming into the country, because they were dumping the machines all over the place and we had lost our manufacturing abilities for washing machines," he declared. "Now we have plants being built."

The steel and aluminum industries, too, "will see a lot of good things happen," the president said.

The news was met with a plunge in U.S. stocks and an outcry from trading partners. "Pandora's box has opened," a Japanese trade official said.

The furor stems from Washington's justification for the tariffs. While America's 169 existing antidumping and countervailing duties on steel comply with WTO rules, the new measures are based on U.S. law alone.

The U.S. invoked Section 232 of the Trade Expansion Act of 1962, which grants the president authority to impose trade curbs for national security reasons. Dumping of steel and aluminum by countries such as China has reduced U.S. production capacity, making it harder to ensure a stable supply for sensitive applications like arms manufacturing and defense technology, the thinking goes. This marks the first use of the provision in 36 years, since a 1982 embargo on Libyan oil.

The U.S. butted heads with Japan over trade from the 1960s through the '80s, with Washington pointing to its trade deficit as it pushed Tokyo to open up its markets for such products as textiles, steel, televisions and machine tools. The friction between the allies was resolved through high tariffs on the American side and voluntary export restrictions on the Japanese side.

But this time, countries likely to be hurt by the new tariffs are prepared to dig in their heels rather than try to avoid conflict, raising the prospect of a full-fledged trade war.

"We strongly regret this step, which appears to represent a blatant intervention to protect U.S. domestic industry and not to be based on any national security justification," European Commission President Jean-Claude Juncker said Thursday.

The European Union body "will bring forward in the next few days a proposal for WTO-compatible countermeasures against the U.S.," he said. These may include safeguard duties, a kind of temporary emergency measure, as well as a complaint to the WTO.

Germany "rejects" the U.S. tariffs, a government spokesman said Friday, adding that they could seriously affect the country's trade in steel and aluminum. WTO Director-General Roberto Azevedo said his organization is "clearly concerned" about Washington's plans.

"All countries should cope with the situation together and work with each other to explore solutions instead of taking trade restrictions unilaterally and profiting oneself at the expense of the neighbor," Chinese Foreign Ministry spokeswoman Hua Chunying said. The Commerce Ministry said China will work with other countries to take appropriate action to protect its interests if necessary.

Some speculate that Beijing could retaliate with curbs targeting soybeans, a leading U.S. export. China's status as the largest foreign holder of U.S. government debt may also give it leverage.

Domestic politics may have played a role in Trump's decision. A district in Pennsylvania -- a battleground state won by Trump in the 2016 election -- is holding a special congressional election March 13. The 18th district, near the traditional steel hub of Pittsburgh, is home to an estimated 17,000 voters who work in the steel industry. Midterm elections, widely regarded as a referendum on the president's performance, are coming up in November as well. Trump may be offering the tariffs as a gift to blue-collar voters.

But this will come at a price in a global economy increasingly dependent on cross-border supply chains. The Business Roundtable, an association of CEOs of leading U.S. companies, said Thursday that it "strongly disagrees" with the tariffs, arguing that they will "hurt the U.S. economy and American companies, workers and consumers."

Automakers, for example, use lightweight yet durable steel sheet and bars to improve fuel economy -- high-quality products for which it can be difficult to find alternatives. These companies may be forced to pass on increased costs from the tariffs to customers by raising prices, making American cars less competitive, said Keisuke Hanyuda of Deloitte Tohmatsu Consulting. Toyota Motor said the tariffs would lead to substantially higher prices for its vehicles in the U.S.

Steel duties imposed in 2002 under then-President George W. Bush sent prices surging 30-40% and led to the loss of an estimated 200,000 jobs. A safeguard tariff on tires during the Obama administration cost consumers roughly $1.1 billion in 2011 alone. Trump's steel and aluminum duties would lead to higher inflation and lower growth, U.K.-based Oxford Economics warned.

The U.S. spearheaded the General Agreement on Tariffs and Trade that paved the way for the WTO's formation in 1995. Trump has called for withdrawing from the organization since his presidential campaign, asserting that it has failed to fix unfair trade. His latest move has cast a shadow over the global free trade system.

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