US steel tariffs explained

Trump’s controversial levy comes into force
today – so what does it mean for the world economy?

In Depth

UK International Trade Secretary Liam Fox said that Donald
Trump’s tariffs of 25% on steel, and 10% on
aluminium, was “patently absurd”, while French
president Emmanuel Macron told the US president over the phone that
the tariffs were “illegal”.

The EU, Canada and Mexico have already announced plans
for retaliatory tariffs on US goods, opening the
door to the prospect of a tit-for-tat trade war with serious
ramifications for the world economy.

What is a tariff?

A tariff is a tax imposed on imported goods when
they enter a country, either as a fixed additional cost per unit or
as a percentage of their value.

Before the widespread introduction of income
tax, tariffs were one of the main instruments available to
governments to raise revenue.

However, “the main purpose of a tariff these days
tends to be about protecting particular domestic industries from
foreign competition”, says Amitrajeet A.
Batabyal, an economics professor at the New
York State-based Rochester Institute of Technology, in an article
on The Conversation.

Depending on the economic clout of the countries
involved and the size of the affected industries, tariffs can upend
national economies and even affect global trade.

Why steel?

Protecting domestic manufacturing jobs was a
major plank in Trump’s “America First” campaign during the
presidential election, and the steel industry is one of the sectors
most seriously affected by competition from cheaper overseas
suppliers.

By introducing the new levy, Trump “joins a long list
of presidents going back to Richard Nixon who’ve sought to use
tariffs and other restrictions to protect a long-ailing US steel
industry whose heyday ended decades ago”, says financial news
site MarketWatch.

What are the pros and cons of
tariffs?

Tariffs are a key tool of the economic policy
known as protectionism, which seeks to protect national industries
from overseas competition.

In theory, artificially inflating the cost of
imported goods encourages businesses to buy domestic, preventing
national industries from being undercut by cheaper foreign
labour.

Left-wing advocates see protectionism as a means
of protecting workers from a “race to the bottom” in which
employers slash wages and benefits in order to compete with
emerging economies.

However, while American steel and aluminium
workers may welcome the new measures, consumers are likely to be
less enthusiastic, as import-reliant businesses affected by the
tariffs are likely to pass on increased production costs to
customers.

The higher costs of production could also spell
trouble for workers in businesses reliant on imported steel or
aluminium.

“Studies found that the most recent steel tariff
imposed by President George W. Bush in 2002 resulted in as many as
200,000 jobs lost in industries that use steel to make their
products,” says Business Insider.

In addition, in a globalised marketplace, a move
towards protectionism in a major economy such as the US risks
causing severe disruption to world trade, as trading partners
impose their own retaliatory tariffs.

The Confederation of British Industry’s
international director, Ben Digby, has warned that such a trade war
“will damage prosperity on both sides of the Atlantic”.