The problem is government-sponsored distortions
The preliminary U.S. decision to apply 25 percent tariffs on steel imports and 10 percent tariffs on aluminum imports has been met with widespread apprehension by proponents of the rules-based multilateral trade system. Economists cite the possibility of retaliation from impacted trade partners in the form of tariffs on U.S. products, which could compound the impact of higher prices for consumers as products that incorporate steel and aluminum become more expensive. There is some validity to these points and all should be carefully weighed.
But the problem the tariffs are supposed to address isn’t receiving as much attention. The simple fact of the matter is that a number of countries are undeniably engaging in unfair and even predatory trade practices in the steel and aluminum sectors which are damaging to their trade partners.
State-owned enterprises that respond to government policy targets rather than economic conditions, market distorting subsidies, export “friendly” exchange rates, and a willingness to dump products have all helped to produce overcapacity, and made it easier for that excess production to spill over into other markets. It would be hard to reconcile those realities with anyone’s definition of “free” trade.
The problem isn’t U.S. imports – it’s global overproduction
To put the magnitude of the overcapacity issue in perspective: experts maintain that the world needs about 400 million tons of excess steel capacity. Today, we have roughly 730 million tons. About half of that is in China, which has grown to be the world’s largest steel producer.
As growth in China slowed in recent years, its overseas shipments more than doubled from 2008-2015, expanding to 112 million tons – that’s more than the total amount consumed in the United States. More recently, China has made efforts to cut its overcapacity, and both production and exports have begun to drop.
Although some see the proposed U.S. tariffs as being directed at China, China has only about a 2 percent share of U.S. steel imports. Ten other countries export more steel to the United States Share levels in aluminum are a bit higher, but not predominant.
It would be inaccurate therefore to characterize the United States as being overwhelmed by Chinese exports, by any stretch of the imagination. The real issue is that the size of China’s output ensures there will be significant ripple effects on global markets, irrespective of export levels to the United States.
Any remedy has to address the glut of production
Where does all this leave us? It would be entirely reasonable to debate whether the announced U.S. tariffs are the most desirable means to address these issues. But we should not forget that the reason we are in this situation in the first place is because of the decision of certain countries to pursue predatory trade practices and beggar-thy-neighbor industrial policies which have contributed to a damaging global glut.
The focus should be on how to address those underlying core problems. If not, the recently announced tariffs might simply be the opening move.
None of this is intended as a defense or justification for the recently announced actions. The potential negative consequences are very real and should not be lightly dismissed. But viewing this strictly as an example of irresponsible and destructive “protectionism” on the part of the United States is to willfully ignore a big part of the picture. And if this action does in fact prove to be the opening shot in a trade war, it will be entirely fair to ask if this war was launched from Washington DC – or from the capital cities of other countries.
A problem that affects everyone requires a solution involving everyone
Rather than opening the door to a potential cycle of tit-for-tat retaliation that could be focused against the United States, it would be far more productive to get serious about a multilateral solution to the global problem of overcapacity in steel, and the accompanying predatory trade practices. After all, the negative impact of state-sponsored overproduction in China affects Europe, Canada, and other steel producers just as it affects the United States.
Thus far, the willpower to pursue and achieve such a solution has simply not been there. Perhaps the current circumstances will provide sufficient motivation.
Stephen Olson is a managing editor for TradeVistas. The original version of this article appeared in Forbes.
Stephen Olson is a Research Fellow at the Hinrich Foundation. Over the course of his 25 year international career, Stephen has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organizations, government, and academia. He is currently a Visiting Scholar at the Hong Kong University of Science and Technology.