How the tariffs came about

In March 2018, President Trump announced that the US would be introducing a 25% import tax on steel and a 10% import tax on aluminium to protect ‘national security’ (a legitimate WTO exception for increasing tariffs). Despite this explanation, the move was interpreted by many as a ‘safeguard’ action against import surges hurting local US industries and therefore the tax was widely assumed to be aimed at China, affecting approximately $50bn of Chinese goods.

Initially exemptions were offered for certain close allies (Mexico and Canada who are members of the North American Free Trade Agreement ‘NAFTA’ and the EU) for a short period during which negotiations could continue. Those negotiations failed to dispel the concerns the US had raised and on 1 June 2018, the exemptions expired bringing the new higher tariffs into effect against those entities.

The global response

The tariffs have been condemned globally, particularly after the exemptions expired. Countries expressed concerns that the tariffs would distort international commerce and that the situation could escalate into a global ‘trade war’, with some countries claiming that the US behaviour was 'America First' protectionism.

By choosing to interpret the actions of the US as trade safeguards, WTO members are allowed to respond if they do not receive compensation for the trade restrictions within 90 days by raising their own tariffs proportionately. This can be an effective mechanism to influence public opinion and political decision making, although at its heart it is an unsatisfactory remedy as it seeks to enforce compliance with WTO rules by imposing precisely the type of barriers which WTO membership is meant to break down.

Nonetheless, the US’s significant trading partners have quickly invoked these rights in the hope of putting pressure on the US to reverse its policy.

The EU notified the WTO of the intention to retaliate against imports of certain goods in advance of the expiry of the exemption and the 30-day notice period on those import tariffs consequently expired in mid-June. The EU also submitted a request for consultation to the WTO on 1 June and subsequently on 7 June announced that it intends to respond by introducing its own tariffs against more than 100 US goods, which the EU has indicated will take effect from 22 July 2018.

The EU's move has been tactical, targeting goods that are produced in states governed by individuals with perceived influence with the US government. The EU operated a similar approach when George Bush Jr was in office and raised tariffs against EU steel. By targeting goods such as orange juice which was produced in Florida, a swing state and one in which Jeb Bush was governor, pressure was perceived to have been put on President Bush who lifted the levies. It still took one year and nine months.

Will it be successful?

However, it is unclear what response President Trump will make to such a tactic and the EU is aware that such tactics may not be successful this time around and could in fact backfire.

In addition, as well as raising tariffs on US products (including whiskey, cheese, pork, bourbon and steel), Mexico is utilising its membership of the WTO by bringing dispute proceedings against the US tariffs on steel and aluminium, claiming that the measures violate WTO rules. India and China have taken similar actions. The WTO intends such disputes to take approximately 1 year plus three months if an appeal is made. However, recent refusal by the US to allow appointment of appeal judges means that the pressure on the system is currently high and it may shortly become impracticable to obtain appeal decisions. This could undermine the viability of such WTO disputes requiring parties to fall back on their direct action and potentially ever-increasing tariff barriers.

One effect of the US tariffs is that the trade agreement with Mexico and Canada NAFTA has been circumvented unilaterally. This could have a severe impact on the Canadian automobile industry that exports 95% of vehicles it produces to the US and potentially calls into question the short-term future of the trading zone. US government policy appears to be focussed on tightening up restrictions and immigration across the borders.

Canada looks to be retaliating with plans to introduce its own dollar for dollar tariffs, having expressed that the US tariffs have left the country feeing ‘sad and insulted’. Tensions at the G7 summit on 9 June 2018 led to further exchanges between the leaders of US and Canada including Canadian government statements that it would not be bullied. Negotiations are likely to continue either openly or behind closed doors; it is however unclear what direction they may take in the short term.

Effects on importers, exporters, producers and consumers

While current discussions surrounding trade are undeniably political, the main groups likely to be affected by the increased tariffs are importers, exporters, producers and consumers. This is not just those involved in the metals trade.

Tariffs on raw materials have a knock on effect on finished products containing foreign components. For instance, research suggests that around half of imports into the US are ‘intermediate goods’ bought by US companies for use in production. Tariffs on raw materials/components will impact the cost of producing goods, and in turn the price that consumers will need to pay for the finished products. Where such finished products become less competitive local producers in the US may switch to other supplies.

Outside the US, higher tariffs in the US for imported metals may result in such (e.g. Chinese and Canadian) metals being diverted to other markets leading to oversupply and depressing prices worldwide. This may have an effect on local production and employment.

A similar effect may arise in other goods used for retaliation. Consumer costs of imported US products (e.g. cranberries) may rise, and where those are components in other goods the price of those goods (including any export goods) will also rise. Consumers may therefore face a wave of product price increases as a result of their own retaliatory measures. While the retaliation is currently largely focussed on agricultural products and (tit for tat) metal imports, this effect may increase in the future if further retaliation takes place.

The introduction of tariffs by the US and retaliatory tariffs across the world is likely to send waves (of varying severity) through global supply chains. Although a company may not buy materials, components or goods from the US directly, its supplier may do. Such suppliers might transform/incorporate the items from the US into an item that it provides to a company based in a country seemingly unaffected by the introduction of the tariffs. Upon supplying the item, the supplier may also pass the cost of the tariffs on. This will then inevitably affect the price charged for the finished product. Price and cost variations therefore may not be easy to predict.

All this is taking place at a time of uncertainty for British exporters regarding future trade (regulatory) and tariff barriers with the EU. Although many businesses are dedicated to dealing with the markets as they find them, increasingly and perhaps more importantly, unpredictable world supply chain tariffs make any kind of international dealing more complex. In turn, exporters need to be protecting themselves from commitments which become uneconomical to service.

Overall, global trade is likely to be facing ongoing uncertainty over a number of years. Progress on international trade deals has slowed (TTIP appears to be unlikely under the current US administration and other trade deals, including EU trade deals, may be delayed pending UK withdrawal deals) and the UK has not yet begun replacing those it will lose when it leaves the EU. The WTO most-favoured-nation fall back is also under threat with unilateral actions by the US and no consensus upon what status the UK will have after Brexit. Optimists will point out that world trade has survived worse. However, the direction of travel towards the liberalism of international trade may for a while be stalled.