Trade showdown

Your tariff questions, answered

Marketplace Staff May 31, 2018
Sean Gallup / Getty Images
Trade showdown

Your tariff questions, answered

Marketplace Staff May 31, 2018
Sean Gallup / Getty Images

This post was updated on June 1. 

In a move that threatens to incite a major trade war with allies, the Trump administration says it’s slapping tariffs on steel and aluminum imports from Europe, Canada, and Mexico.

Commerce Secretary Wilbur Ross says there will be a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum.

President Trump announced the tariffs in March but the U.S. granted exemptions to the European UnionCanada, Mexico and other U.S. allies. Ross says talks with Canada and Mexico over the North American Free Trade Agreement are “taking longer than we had hoped.” He says negotiations with Europe have “made some progress” but not enough to merit an exemption.

The European Union is reacting harshly. European Commission President Jean-Claude Juncker says the tariffs are “protectionism, pure and simple,” and the U.S. should expect “conterbalancing measures” from Europe soon. Mexico, too, says it will answer tariffs on steel and aluminum with duties of its own on a variety of U.S. products. Canadian Prime Minister Justin Trudeau called the tariffs “totally unacceptable,” and the Canadian government announced retaliatory measures of its own.  

On Twitter, Marketplace host Kai Ryssdal asked what questions you have about these tariffs. Here are some of them, answered by Marketplace journalists and experts.

Will these tariffs cause a recession?

These new tariffs will “almost surely not” cause a recession, says Mary Lovely, economics professor at Syracuse University and a senior fellow at the Peterson Institute for International Economics. “This industry is important but it’s not that important. Costs will rise. We’ll see some job dislocation … but we will not see a recession.”

When will things start to cost more?

We’re seeing higher prices already. Prices of steel and aluminum have been rising significantly in the past few months, due to strong demand, uncertainty about trade policy and the tariffs already in place on steel produced in countries that didn’t receive exemptions, like Russia and China.

“Prices right now in the market have risen by more than the level of the tariff, which is not a result we typically get in trade,” said Thomas Prusa, chair of the economics department at Rutgers University.

The addition of Canada, Mexico and the European Union will only drive prices up further, experts say. It’ll take some time for those increases to work through the rest of the economy. Depending on the product, manufacturers may be able to absorb some increases, but inevitably they’ll pass their higher costs to consumers.

“Steel is heavily used in construction, in autos, in vehicles of all kinds, in a whole series of sectors in the economy, and it will take perhaps a number of weeks, if not months, for the increased prices of steel to translate,” said Jennifer Hillman, professor of law at Georgetown University.

Why Trump can impose these tariffs

The president has lots of constitutional authority to levy tariffs. Initially, the Constitution gave Congress the right to regulate trade between the U.S. and other nations. But over the past century, Congress passed a series of laws that gradually transferred trade powers to the president. Why? Because Congress, historically, was the protectionist wing of government. It started a trade war in the 1930s after imposing a series of tariffs. Over the years, the president was the adult in the room and was more restrained in trade disputes.

The transfer of trade power started in 1917, when the U.S. was entering World War I. The Trading with the Enemy Act of 1917 says the president can regulate all forms of international commerce and freeze or seize foreign assets during war time.

Congress followed up with the Trade Expansion Act of 1962 and the Trade Act of 1974. They give the president the authority to impose tariffs or quotas if national security is threatened, or in retaliation for unfair trade practices.

What is tariff money used for?

“Who actually collects tariffs and where does that money go?” — Listener Mary Gordon, via email.

Tariffs typically get paid by licensed importers. And they get collected by the Bureau of Customs and Border Protection. That money goes to the U.S. Treasury and becomes part of the general budget. A long time ago, tariffs were a pretty significant source of income for the government, but these days, they are a very minor contributor, according to Gary Hufbauer, a former trade negotiator and a fellow at the Peterson Institute for International Economics.

Our real trade imbalance

The U.S. trade deficit stood at $568.4 billion last year, while the trade imbalance with China, specifically, was $375 billion.

Note: While President Trump seems to view trade imbalances as a sign of weakness, deficits aren’t necessarily bad or good. We’ve run one every year since 1974, and if our money is getting sent out into the world, foreign investors in turn may pour that money back into the U.S. in the form of investments.

As for whether we’re getting robbed, the Trump administration cited China’s theft of intellectual property as the reason it’ll impose tariffs on $50 billion worth of Chinese goods.  A 2017 report from the United States Trade Representative did say this is costing the U.S. between “$225 billion and $600 billion annually.” Robert Daly, director of the Wilson Center’s Kissinger Institute on China, told us that Chinese law forces U.S. companies to share their technology, and Chinese companies outright steal it.

Who gets to decide about exemptions?

Officially, the U.S. Commerce Department has said that Secretary Wilbur Ross, a political appointee, would evaluate each request, “in consultation with other Administration officials.” In practice, that will be difficult. As of Thursday afternoon, the department had received more than 10,000 applications to exclude certain products from the tariffs. Earlier this month, a Commerce spokesperson told Marketplace it has expanded its staff from six people to 19 to process the applications. Officials did not respond to a request for more details about the qualifications of those staffers.

“They’re supposed to have a good deal of expertise in steel and/or aluminum,” Jennifer Hillman said of those career civil servants. Hillman recently served on the World Trade Organization’s appellate body and is a former commissioner of the United States International Trade Commission.

Commerce does have steel experts, she said, but not nearly enough to review thousands of applications.

“The bottom line is this is an overwhelming process, and right now the Commerce Department is overwhelmed and behind,” Hillman said.

Your savings

Your 401(k) and other savings plans are not likely to be affected much, at least initially. There’s still a lot of economic good news, including strong corporate earnings and jobs growth, that has been propping up stocks.

There will, of course, be winners and losers. If your 401(k) happens to be invested in U.S. steel or aluminum producers, you may see a bump as those companies become more competitive. On the other hand, manufacturers now facing higher prices for those materials could see their earnings fall, which could hurt stocks.

If this trade “skirmish” becomes an all-out war, and tariffs grow to include more products from more countries, that is not good for markets. Trade barriers generally raise costs, and that could erode corporate profits and hurt business and consumer confidence.

“Depending on the severity of the tariffs, you may have companies that feel they need to pull back their spending, pull back their hiring,” said Quincy Krosby, chief market strategist at Prudential Financial. “That can definitely have an impact.”

Also, investors don’t like uncertainty, and there’s a lot of uncertainty about where this trade spat goes from here.

“President Trump and his policy makers are taking a very erratic and hard-to-figure-out approach,” said Cary Leahey, senior adviser to consulting firm Decision Economics. “That could undercut business planning, it could affect investments adversely in general and eventually could be a real cloud on stock prices.”

China and U.S. debt

“China has never threatened to leverage the debt,” says Syracuse economics professor Mary Lovely. “Any kind of retaliation that China uses as a response to the Section 301 tariffs or steel tariffs or any other tariffs that the Trump administration levies on China will almost certainly be another set of tariffs on our goods. So they’ve already indicated pretty clearly how they intend to retaliate. They’re very good students of the American economy and American politics. And so I expect that they will aim their tariff arrow quite clearly to hit specific targets in the U.S.”

Effect on NAFTA negotiations 

The tariffs cast another shadow over an already long, drawn-out process. Canada and Mexico are both big suppliers of steel and aluminum to the U.S., and several trade experts agreed Thursday’s announcement will make it harder to get a deal.

Presumably, the announcement was meant to speed up the NAFTA negotiations by putting pressure on our trading partners, said Rachel Brewster, professor of law at Duke University and former legal counsel in the Office of the United States Trade Representative, but she was skeptical.

“It certainly doesn’t make the NAFTA negotiations easier,” Brewster said. “It adds yet another issue, and it’s also an issue that causes resentment.”

“I do think this throws a wrench into the NAFTA negotiations and find it very unlikely that they’re going to conclude positively any time soon,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics.  

Role of the WTO

President Trump has previously threatened to withdraw from the World Trade Organization.

“If you look back through the campaign, Donald Trump had a number of times that if we don’t like what the WTO is doing, we are going to pull out of the WTO and he sees it as one of these unfair trade deals that the U.S. has been saddled with. Now that is a huge change, since WWII the U.S. has been the main backer of the WTO,” explained Financial Times editor Shawn Donnan. “There are still U.S. laws on the books that would let the Trump administration go ahead and do its own actions but the consensus for the last 20 or so years has been that actually the WTO is kind of a neutral arbiter and is a better place to have these fights. It is sort of the Supreme Court of trade if you will,” he added.

The European Commission is taking the case to the WTO, saying it will launch legal proceedings on June 1  against the U.S.

“Now that we have clarity, the EU’s response will be proportionate and in accordance with WTO rules,” said Commissioner for Trade Cecilia Malmström. “We will now trigger a dispute settlement case at the WTO, since these U.S. measures clearly go against agreed international rules. We will also impose rebalancing measures and take any necessary steps to protect the EU market from trade diversion caused by these U.S. restrictions,” 

Amy Scott, Nancy Marshall-Genzer, Sabri Ben-Achour, Scott Tong, Tracey Samuelson, Jed Kim, Sean McHenry, Olga Oksman and Janet Nguyen contributed to this story.

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