Leibowitz: Trade — bedrock economic relationships are circling the drain

They have called into question the most basic alliances the US has developed over the last 80-plus years. A major move such as this will echo for years, eviscerating the post-World War II global economic structure and resurrecting “beggar thy neighbor” trade actions by major trading partners.

It’s not just personal, it’s business

Consumers will pay more for the products they need, many of which are unavailable from US producers (think clothes, shoes, specialized steel and aluminum products) or where import restrictions raise prices for even domestic products (think cars, motorcycles, beer, capital machinery).

As President Trump waxes indignant over the temerity of countries defending their interests, tariffs on such products as European wines threaten to skyrocket, further damaging consumers and locking in inflationary pressures.

Businesses will suffer too. American manufacturers rely on imported components and raw materials, including steel and aluminum, but also semiconductors, rare earth metals, titanium and copper.

The road we traveled

How did we get to this ugly point? Blaming Donald Trump alone is too easy. President Biden and his team kept these tariffs, undermining the international cooperation that undergirded prosperity and reduction of poverty over the last seven decades. Courts gave leeway to the president to constantly change Section 232 measures with no maximum tariffs, ignoring statutory time limits and other congressionally mandated restraints on presidential power. They also must bear a share of the blame.

After World War I, merchant fleets – built to carry the tools of war – were still floating. Congress wanted to protect American shipping, so it adopted the Jones Act to encourage US shipbuilding by eliminating foreign-built ships and foreign crews from domestic trade. That strategy failed: US shipbuilding has shrunk to global insignificance. China builds 200 times more ships than the US.

Congress passed the Smoot-Hawley tariff in 1930, seven months after the 1929 stock market crash. It raised US tariffs to levels approaching 60% on many goods, triggering massive retaliation from major trading partners. The Great Depression, which started in the US, rapidly spread to the rest of the world. Some leaders (Germany, Italy, Japan) concluded that bellicosity, rearmament, and aggression were quick ways to employ workers and create prosperity.

After the war that almost inevitably followed, there was a near-unanimous agreement that the tariff spikes spawned by Smoot-Hawley were a huge mistake that must not be repeated. The Bretton Woods agreements established the General Agreement on Tariffs and Trade, the International Monetary Fund, and the World Bank. These institutions helped countries cope with changing economic and political realities, as more than a hundred new countries entered the world community in the wake of the disintegration of colonial empires.

The World Trade Organization (WTO) was created in 1995 – the apex of globalization. China joined the WTO in 2001. Western countries initially welcomed China, believing that integration with the world economy would bring political liberalization to China. Didn’t happen. The retreat from globalization continues to this day.

Our present plight

Trump now wants to finish destroying the postwar economic order. He is destroying the geopolitical order too. That is evident from the treatment of Ukraine—the notion of global collective security is what keeps alive more than 100 small and powerless nations that now exist at the sufferance of the powerful. When the global order sinks, the strong will rule the weak rather than protect them. Violence is likely to ensue until another system emerges from the conflict.

President Trump claims that the US was taken to the cleaners by the old system, reducing tariffs and surrendering jobs to others who trade unfairly. Such countries are retaliating against US tariffs, claiming they have been wronged by Trump’s actions.

Those countries are more right than Trump but being right does not justify recklessness. Their retaliation will hurt the retaliators overseas as much or more as it harms the US.

The US is guilty of the same recklessness, such as the threat to impose 200% tariffs against European wine because of European retaliation against US tariffs, and to double tariffs against Canada for imposing punitive fees on electricity sourced by New York, Wisconsin, and Michigan. Canada (it was the province of Ontario) backed down, but the tit-for-tat descent into irrationality has commenced. This is “beggar thy neighbor” all over again.

Where to now?

A step back is needed. For the US, maybe the courts will reconsider giving unlimited power to the President in imposing trade restraints based on extremely flimsy national security “threats”. Maybe Congress will arise from its slumber to regulate presidential power more effectively.

Maybe the administration will eventually see that picking industrial winners (a few steel and aluminum producers) and losers (consuming industries in transportation, construction, and capital equipment) that employ many times the workers, does not make for good domestic policy.  Maybe international negotiations will focus on ways to moderate the Chinese obsession with exporting that brought many of these issues to a boil and turn away from the current circular firing squad with our friends.

We need sober adults to emerge from the angry and petulant ooze before it’s too late. Any takers?

Editor’s note

This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.