Trump set to unleash a lot of pain as he fails to learn from history

Donald Trump and his advisers have selective memories, choosing the lessons from history that suit Trump’s protectionist convictions while ignoring those that don’t.

The tariffs on imports of steel and aluminium to the US are broadly a reprise of what Trump did in 2018, when he slapped a 25 per cent tariff on steel imports and a 10 per cent rate on imported aluminium.

US President Donald Trump has a very selective memory.Credit: AP

There are some differences, however, between now than then.

The latest version imposes the 25 per cent rate on both steel and aluminium and, whereas the 2018 actions exempted imports from some countries, including Australia, the 2025 version applies to all countries and, unlike 2018, also applies to some key downstream products.

In both instances, Trump justified the tariffs on the grounds of national security, unfair trade practices, the revitalisation of America’s domestic steel and aluminium industries and the adding back of jobs lost over the decades of the steel industry’s decline.

Did the 2018 tariffs achieve their goals?

They did, albeit at a heavy cost, as the steel industry’s experience illustrates.

According to the Peterson Institute for International Economics, US steel prices, for instance, rose about 9 per cent after the tariffs were introduced and the 2018 pre-tax profits of US steel producers increased by about $US2.4 billion ($3.8 billion). Nearly 9000 jobs were added. Capacity utilisation in the industry improved, rising from 74 per cent in 2017 to about 80 per cent in 2018.

Steel is widely used in manufacturing and construction so higher domestic steel prices flow to downstream industries.

The institute estimated that the tariffs increased the costs for steel users by $US5.6 billion – effectively $US650,000 for each job created within the steel industry.

The Peterson Institute for International Economics estimated that the 2018 tariffs increased the costs for steel users by $US5.6 billion – effectively $US650,000 for each job created within the steel industry.Credit: AP

Car manufacturers were particularly affected; General Motors said the tariffs cost it about $US1 billion and Ford claiming a $US750 million hit.

While the 2018 tariffs did attract new investment and improved the industry’s efficiency, both investment and capacity utilisation subsequently fell back. Today the industry operates at about 75 per cent of its capacity.

There’s nothing surprising about the effects of the 2018 tariffs. Protection does deliver an opportunity for the protected sector to increase its prices and profits and then that flows through in the form of higher costs for their customers and, eventually, end-consumers.

The US steel industry is relatively small, supplying only about 17 per cent of US demand. Domestic production is only about 90 million tonnes a year. By comparison, China produces just over a billion tonnes a year.

So, to make a few companies more profitable, the steel users that source from offshore more than 80 per cent of all the steel used in the US will pay the price of the tariffs – or pass it on.

The 2018 tariffs did exempt some countries including, a year after they were introduced, Canada and Mexico were exempted after the renegotiation of the North American Free Trade Agreement. Canada is the biggest exporter of steel and aluminium to the US.

The latest tariffs, without exemptions, will obviously have a far more significant impact than the earlier version.

Australia is hoping that, as one of the few countries with which the US has a trade surplus, Trump might again exempt our exports to the US of steel and aluminium. Trump has said he will consider one, although the US has accused Australia of breaching a verbal undertaking to limit aluminium exports to the US. Instead, they have surged.

There’s already pushback against any exemption, with Trump’s senior counsellor for trade and manufacturing (and arch protectionist) Peter Navarro, telling CNN that Australia was flooding the US market with aluminium and saying that it was too close to China.

“The major companies in Australia are majority held by, the largest shareholder, is China,” he said.

That’s presumably a reference to Rio Tinto, whose largest shareholder, with a 14.5 per cent stake but no board representation, is Chinalco.

Rio owns or controls three of Australia’s four big aluminium smelters. The other major exporter of aluminium is Alcoa, previously the Aluminium Company of America. Alcoa is a US company, headquartered in Pittsburgh. Its major shareholders are all US institutions.

Given that those companies only exported a little more than 80,000 tonnes of aluminium to the US last year – into a market that consumes about 70 million tonnes of the metal each year – that could hardly be described as a flood, but Trump and his advisers do tend to be a bit hyperbolic.

While some may lose more than others, everyone loses in a trade war.

If anyone is to blame for flooding the market for steel and aluminium it is China, which built up a massive steel industry – it produces more than half the world’s steel – during the decades before the pandemic and its property market collapse punctured its growth story. It’s also the world’s largest primary aluminium producer.

With slower economic growth, the property slump and overinvestment in infrastructure reducing domestic demand, China’s steel sector has over-capacity that is being reflected in increased exports at lower prices.

The latest round of tariffs on the metals, because of the absence of the exemptions in their 2018 counterparts, will shut off China’s indirect access to the US market.

Trump’s team learned from the responses to their 2018 tariffs, when some Chinese steel production were – and still have been – able to circumvent the continuing tariffs on its industry by re-routing exports via third countries, such as Vietnam or Thailand, which aren’t subject to the tariffs and, for some of its steel, doing some processing outside China.

The lack of exemptions and the inclusion of some processed metal will cut off those workarounds.

The other learning from 2018 is that there will be retaliation. The Europeans, major suppliers of steel to the US, and Canadians, the biggest supplier of aluminium, will respond with trade sanctions of their own, targeting economically and politically sensitive sectors of the US economy.

Then Trump will respond with his own retaliatory tariffs – his “matching” tariffs – and then the tit-for-tat cycle will do damage to everyone’s economy, including his own. While some may lose more than others, everyone loses in a trade war.

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