The Taiwan Banker

In early March, U.S. President Trump announced import tariffs on the import of steel and aluminum products of 25% and 10%, respectively, attracting the attention of major economies and trading powers around the world. Although Canada and Mexico have close trading relations with the U.S., and are in the process of renegotiating the North American Free Trade Agreement, and Australia is also exempted because it’s willing to negotiate with the U.S., the E.U. has threatened to take retaliatory measures, and negotiations with U.S. Trade Representative Robert Lighthizer have not made substantial progress. With the global economy having recovered in 2017, President Trump’s steel tariffs have caused concern in all sectors over a possible trade war, casting a shadow over trade and economic growth in 2018, and creating higher economic uncertainty going forward.Strengthening America’s domestic manufacturing industryIn fact, the tariffs are not a surprise. In Trump’s “Declaration of economic independence” campaign speech in June 2016 in the small town of Monessen, Pennsylvania – America’s traditional steel production base – he strongly criticized American policy makers for completely ignoring the seriousness of foreign dumping of steel products inside the U.S., emphasizing that excessive globalism had allowed “work, wealth and factories to move overseas,” ”destroying the middle class.” In the speech, Trump further took the constitutional design of American founding father and widely respected economist Hamilton as an example, pointing out that at the time the U.S. only imposed tariffs on imports, rather than income tax on domestic producers. The current situation, however, is completely different. Domestic producers must pay high corporate income tax, but overseas products can be sold in the U.S. without any taxation. From this speech, we can see that for the past year or more, Trump’s administrative logic has been to strengthen American domestic manufacturing, and to reform the economy by reducing taxes and pursuing “fair trade” rather than “free trade.” Job creation policies are supported by blue-collar workersPresident Trump selected the steel industry to make a major trade policy announcement. On the political level, this policy plays a subtle role. Besides the resignation of the White House Economic Advisor Cohn due to disagreement with this decision, many Republicans in the same camp as Trump did not agree with the President due to a deep fear of foreign reprisals. Meanwhile, the policy was welcomed by Democrats. This result surprised many. Long-term observers of American trade policies and bipartisan relations generally agree that the Republican Party has long been more in favor of free trade, while the Democratic Party has been more tepid. Relatedly, the former has been supported more by capitalists, and the latter more by the blue-collar working class. For the past 20 years, however, the large amount of foreign products imported into America – particularly from China – has led to closure of American factories, greatly exacerbating the problem of unemployment. In the face of great difficulties in changing professions, real wage levels have not only stagnated, but even fallen. Trump’s “make America great again” slogan has been welcomed by blue-collar workers for its emphasis on strengthening domestic manufacturing, and creating job opportunities. Employment has been declining year by yearTaking the base metals industry (of which the American steel industry is a part) as an example, according to information published by the U.S. Department of Labor, there were about 700,000 people employed in the industry in 1990, but by 2017 that figure had fallen to 400,000. The period of greatest decline was the ten years from 2000-2010, when that number declined precipitously from 630,000 to 340,000 – a loss of about 300,000 jobs, or 43％ of the total. This decline led to serious employment and social problems. From an economics perspective, though, the slump in America’s steel industry is not purely due to low productivity. Duke University Professor Collard-Wexler and Princeton University Professor De Loecker published a paper in the well-known American Economic Review in 2015 discussing development of America’s steel industry in the 40 years from 1963-2002, finding that employment decreased by 400,000 – or 75% – during that period. Due to production innovations, however, industry output rose from US $40 billion to US $50 billion from 1980-2000, based on 1987 prices. In other words, labor productivity increased five times during that period, transforming the industry into a computer software and equipment business, and making it the fastest-growing manufacturing segment during that period. During that time, the rapid growth of American steel productivity and consequent reduction in employment did not come from globalization, but rather from innovative electronic furnaces replacing inefficient vertically integrated blast furnaces.The question is why the American steel industry has faced such hard times over the last 20 years, causing Trump to take such a major action. The law cited by Trump for the tariffs was Section 232 of the Trade Expansion Act of 1962, based on investigations from the U.S. Department of Commerce, on the grounds of damage to national security, particularly in defense. The main findings from two Department of Commerce investigative reports were that: (1) steel is “important” to national security, and aluminum is “essential”; (2) the current volume of imports of steel and aluminum products negatively impacts the welfare of those two industries; (3) excess import substitution of domestically produced goods seriously weakens the domestic economy; and (4) current global overcapacity constitutes the main force weakening the U.S. economy.With the international economy clearly recovering, other countries fear that tariffs against steel and aluminum could spark a trade war.A direct reference to Sino-U.S. trade issuesBecause the report fingered global overproduction as the main cause, commentators have figured that the Trump administration’s main object should be mainland China, but the main source of imports in those industries is not China, and such measures will only hurt American allies, not China – pointing to an unwise approach by the Trump administration. It is however well known that in the nearly 20 years since mainland China entered the WTO in 2000, its combination of low-cost labor and state capitalism, and its export development policies, have caused imbalances in global trade. Correcting this situation, particularly Sino-U.S. trade issues, was a major focus of Trump’s 2016 campaign.At present, mainland China is not a major importer from America in those industries, a result of various successful anti-dumping and balanced tax initiatives the two industries have put forth. China still has major overproduction, and some of its products are transferred to the U.S. through third countries. This action simply forces various countries to the negotiating table to prevent Chinese overcapacity from continuing to irreparably harm the U.S. One can catch a glimpse of the fact that Chinese products have deeply penetrated the U.S. market by the fact that the report from the Department of Commerce points to national defense and infrastructure.Some domestic optimists believe that America’s one-sided tariff policy violates international trade agreements under the WTO, so it is bound to be revoked in the short term, like the practices of the Bush administration in 2003. President Trump has enacted many anti-establishment policies, though, making him unpredictable to many observers and critics. From his past campaign speeches and policy papers, it is not difficult to see that he highly distrusts the WTO. Using the WTO to constrain American trade policy is bound to be an exercise in futility. Last year, President Trump commissioned a 301-item survey on the Chinese mainland, whose findings are about to come out. Trump’s trade measures on Chinese products, and their possible effects, deserve more attention from Taiwan.