Why tariffs on steel and aluminium are easier said than done

HISTORY will rhyme on March 23rd, when Donald Trump’s tariffs on steel and aluminium imports are due to come into force. Several previous presidents, from Ronald Reagan to Barack Obama, also used tariffs in an attempt to protect America’s steel producers from foreign competition. (There are historical echoes, too, in Mr Trump’s plans to slap tariffs on a range of Chinese imports; in the 1980s Japan was the target.) A rhyme is not a repeat. But past experience is not encouraging.

The central problem for America’s policymakers is that trade is like water. Block its flow in one place and pressure builds elsewhere. When many countries are covered by tariffs, trade may simply be diverted through those countries that are let off the hook. Importers will howl for exemptions. As a result, whatever the Trump administration’s broader ambitions with respect to trade, bellicose unilateralism will make them harder to achieve.

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In 1982 America browbeat the European Community, the forerunner of the European Union, into limiting its steel exports to America. But compensating flows from other countries were so great that America’s steel imports increased overall. Exemptions for Canada, Mexico, Israel and Jordan when George W. Bush imposed tariffs on steel imports in 2002 allowed the value of their exports to America to surge by 53%. Canadian and Mexican exporters, who are exempt from the latest tariffs, already account for a big share of American imports (see chart 1). They could clean up.

In an attempt to stop such substitution Robert Lighthizer, the United States Trade Representative, is said to be offering to spare America’s allies from the tariffs if they ensure their exports to America do not exceed the level in 2017. On March 21st he hinted that negotiations could last until late April. But such a deal would break the World Trade Organisation’s rules, and put bureaucrats, not markets, in charge of allocating export rights.

When different countries receive different treatment, circumventing tariffs looks more tempting. Under Mr Obama, America imposed hefty anti-dumping duties on imports of Chinese steel. Inflows from China duly fell, but those from Vietnam surged. America’s Commerce Department recently concluded that some steel imports, supposedly from Vietnam, actually originated in China. Mr Trump expects Canada and Mexico to ensure they do not become conduits for steel originating elsewhere. But that may be hard, especially for the generic, less processed stuff.

Mr Trump’s tariff barriers are broader than Mr Obama’s were. That makes circumvention harder—but also means importers will squeal more loudly for exemptions. After Mr Bush’s steel safeguards were applied to the EU and Japan in 2002, companies cut off from their suppliers expended much time and money pleading their case in Washington. Eventually 1,022 exemptions were granted, over 90% of them to firms importing from Japan and the EU. This time, the Trump administration expects to spend 24,000 worker-hours processing 4,500 requests to exempt steel products and 1,500 pleas for aluminium. Lobbyists are rubbing their hands.

Metal consumers will also seek to be spared pricier inputs, which can threaten jobs. In 2002 the employers of Gordon Jones, a steel-drum loader, were thwacked with a 30% tariff. “They say that these tariffs are supposed to help workers, to save steel jobs, but what about me?” Mr Jones asked a congressional hearing. More such complaints will come, since steel-consuming sectors account for far more American jobs than steel production (see chart 2).

Tariffs are not Mr Trump’s only trade policy. As well as trying to rewrite the North American Free-Trade Agreement, he is trying to curb China’s trade power. Whatever the merits of these aims, the new tariffs will make it harder to rally allies to his side. “Issues like this have a way of overtaking any meeting or any discussion you’re having,” says Wendy Cutler, a trade negotiator under Mr Obama.

Bill Brock, who was the United States Trade Representative under Reagan, recalls negotiating trade restrictions with Japan in the 1980s. Even amid tensions, he remembers treating Japanese negotiators with respect, knowing that harm to one part of the trade relationship could affect others. Tariffs are “single-shot measures to deal with single issues”, he warns, and risk complicating efforts to resolve broader ones. “Of all the stupid self-defeating things we can imagine, a trade war is the top of the list.”

This article appeared in the Finance and economics section of the print edition under the headline “Steel banned”