Commerce Secretary Wilbur Ross recently declared that the volume of imports of aluminum and steel products from 12 countries — including China, Brazil, India, Egypt, South Korea and Vietnam — “threaten to impair national security.” Under the Trade Expansion Act of 1962 this is a required first step toward imposing penalties on these imports.
President Donald Trump is not required to take a particular action in response to the Commerce Department’s finding, which was supported by extensive reports on the imports and their effect on our domestic industries. Still, as Ross noted, “The president may take a range of actions, or no action, based on the analysis and recommendations provided in the reports.”
The aluminum and steel situation is a classic illustration of just how complex “free trade” really is.
After the announcement of the Commerce Department’s finding was made, economists jumped up immediately to defend free trade and condemn protective measures such as tariffs. And as long as reality stays close to the blackboard and chalk, they are absolutely right. Unfortunately, it doesn’t.
In the real world outside the classrooms and the textbooks the assumptions may not apply, and the textbook’s well-behaved data and orderly graphs do not exist, so trade questions are complicated and solutions unclear.
The 12 nations cited in the Commerce Department’s findings, for example, include NATO and other allies, rivals, countries with national security issues and countries whose partnership we are seeking. Their differences present an intrusion of non-economic factors into what some consider a purely economic issue. And the international relations problems they present are as real as the supply and demand curves for aluminum and steel.
The complications of diplomacy and security are complicated enough, but the economic theory of free trade is no help because it is fragile.
Adam Smith, the father of modern economics who wrote “The Wealth of Nations,” pointed out that if two countries were based on individual liberty and freedom of choice, free trade was the most efficient basis for exchange. Governments were wasting their time trying to manage and manipulate such a system – called mercantilism in his day — to gain a favorable balance of trade and would succeeded only in making it inefficient.
It was David Ricardo, though, who in the 1820s worked out the economic theory of international trade. He demonstrated how each partner benefitted and how consumers enjoyed lower prices. He also exposed the politics of protectionism and how import tariffs on grains meant higher prices and sometimes starvation for poor individuals. These same tariffs, though, benefitted the wealthy land owners who controlled law-making at that time.
There are problems that arise when transporting Ricardo’s theory to the present day, however. The most important of these, usually, is that the assumption that the costs and pricing are equivalent and real is not met. Industries in some countries are highly, and often secretly, subsidized, which artificially lowers apparent costs and prices for its products in international trade.
Obscured subsidies are sometimes difficult to pin down, even when they occur in countries with otherwise open economic data, especially when matters of this type are to be adjudicated by a quasi-court created by treaty to settle trade disputes. Some of these disputes can take years to resolve, and are only rarely satisfying to pursue.
That problem is only aggravated by the further actions of countries to conceal the subsidy and even to manipulate their currencies to lower effective prices more. Exporting goods at lower than their costs is called “dumping” and is forbidden by most trade agreements and our own laws. Enforcement of anti-dumping treaty rules though can be tedious.
As we, and the president, examine the steel and aluminum situation we have to consider, too, the impact of often unfair free trade on our domestic production.
The Commerce Department’s report paints a dismal picture of our domestic aluminum and steel industries. In the case of steel, employment is down 35 percent since 1998. For aluminum, the number of workers employed plummeted 58 percent in the last five years. We now import 90 percent of our raw aluminum. And China can produce as much steel in a month as we can in a year.
Secretary Ross has recommended a global tariff of 24 percent on imports of steel or a tariff of 53 percent on the 12 countries presenting national security issues. His recommendations for aluminum consist of a menu of quota and tariff options applying globally or focused on the same 12 countries.
In international trade matters, both critics and advisers have the easy part. It is up to the president to sort through the diplomatic, economic, and defense information and make a decision; then make it work.
It doesn’t look easy … because it isn’t.
James McCusker is a Bothell economist, educator and consultant.