The US government uses trade remedies such as antidumping, countervailing duties, and safeguards to respond to dumping and perceived unfair competition. An import tax can seem as the proper remedy for an unfair trade practice. The price of imported goods is too low, less than fair value, then a duty will bring the price up to something that is fair. First, the higher import price may give import relief to the few domestic firms seeking protection, but everyone else who needs those imports for production now faces higher prices. Second, there is no economically sound definition of “less than fair value,” and the current application does not even align with the US Federal Trade Commission’s view. Third, the Commerce Department’s dumping determination process is plagued with methodological and calculation inconsistencies that can result in meritless dumping determinations. Legislative changes and pressures from interest groups over time have transformed these trade regulations from a tool to respond to unfair trade practices into a weapon used to stymie competition in favor of a few domestic firms at the cost of other domestic firms and American consumers and workers.15 Finally, while antidumping, countervailing duties and safeguards are responses to unfair competition from abroad, they do not necessarily change the offensive behavior.
In 1962 the Trade Expansion Act was signed by JF Kennedy. This act recognizes, fully and completely, that the U.S. cannot protect our economy by stagnating behind tariff walls, but that the best protection possible is a mutual lowering of tariff barriers among nations so that everyone can benefit from a free flow of goods. The U.S. can benefit from increased export opportunities as other nations agree to lower their tariffs. Increased exports and imports will benefit our ports, steamship lines, and airlines as they handle an increased amount of trade. Lowering our tariffs will give an increased flow of goods to American consumers. The U.S. industries can be stimulated by increased export opportunities and by freer competition with the industries of other nations for an even greater effort to develop an efficient, economic, and productive system. The results can bring an era of growth. ( JFK) Having this authority will allow us to negotiate with our other trading partners, such as Canada and Japan. This will allow our authority to widen markets for raw materials and manufactures of the less developed nations whose economic growth is so important to us all and to strengthen our efforts to end prejudice. (JFK)
Section 232 of the Trade Expansion Act was edited to allow the supervisory branch to conduct investigations to “determine the effects on the national security of imports.” Commerce Department has within 270 days of initiating any investigation of issues in a report to the President with the investigation’s findings. This can include if certain imports are threatening to impair America’s national security. From this point, the President has 90 days to decide whether he agrees with the findings and, if to adjust the imports, but only by the legal authority under section 232 of the Trade Expansion Act. ( Section 232)
The Secretary of Commerce can conduct inquiries to find the effects of imports on anything that the national security of the United States. Section 232 investigations include consideration of:
• domestic production needed for projected national defense requirements;
• domestic industry’s capacity to meet those requirements;
• related human and material resources;
• the importation of goods in terms of their quantities and use;
• the close relation of national economic welfare to U.S. national security;
• loss of skills or investment, substantial unemployment and decrease in government revenue; and
• the impact of foreign competition on specific domestic industries and the impact of displacement of any domestic products by excessive imports. ( section 232)
Since 1980, the Commerce Department has conducted fourteen Section 232 investigations. Past investigations and remedies have included the following:
• Integrated Circuit Ceramic Packaging – 1992
o Defense provided research and development funding for industry
• Antifriction Bearings – 1988
o Implementation of Buy American restrictions on super precision bearings for jet engines and miniature and instrument precision bearings for guidance systems
• Metal Cutting and Forming Machine Tools – 1986
o Voluntary restraint agreements with multiple countries on imports and an aggressive domestic industry competitiveness action plan. ( section 232)
In the early 1960s, it was quite easy to pass on any increase in costs onto prices, and thus raising employee wages was not difficult. This resulted in higher domestic steel prices and a boost in imports. Responding to calls from the domestic steel industry, the administration of President Lyndon Johnson had Japan and the European Community agree to “voluntarily restrict” U.S.-bound steel exports. More than half a century later, the United States has repeatedly implemented various measures to curb steel imports, including voluntary export restrictions on the part of trading partners, anti-dumping duties, the trigger price mechanism (TPM) designed to inhibit steel imports below set prices, and countervailing duties intended to neutralize the effects of subsidies. The import restrictions invoked on March 23, 2018 differ from those previously implemented safeguard measures in citing national security as the reason for their imposition. As an internationally accepted exception, a WTO member may take “any action which it considers necessaries for the protection of its essential security interests.” However, the scope of the applicability of this exception is understood as being restricted. Indeed, action under the Section 232 of the Trade Expansion Act has been taken only in eight cases, all of which are oil-related, with import restrictions imposed in only five of them. A broad range of industries, including high-tech and scarce resources development, are perceived to be related to national security. Why did the United States pick only the steel and aluminum industries as being applicable to protection on the grounds of safeguarding national security? The question is all the more relevant given the fact that there are very few industries for which the entire production process is completed within a single country in today’s world where such processes are distributed globally with most industries integrated into global production networks. As far as judging from the U.S. Department of Commerce’s reports on the Section 232 investigations on the effects of steel and aluminum imports (2018), there is no convincing reason why only the steel and aluminum industries are regarded as having been exposed to and weakened by competition with imports and thereby threatening to impair national security. If increasing imports are causing a decline in the competitiveness of the domestic steel and aluminum industries and thereby threatening to impair national security, the same should apply—to quite a considerable extent—too many other goods and services, and other countries would use the same reasoning to justify the imposition of trade restrictions. As a result, unilateral import restrictions on the grounds of safeguarding national security would propagate to many other industries and other countries. It is a well-known fact that the Tariff Act of 1930, commonly known as the Smoot-Hawley Tariff Act, was introduced with the intention of protecting farmers in the Midwest but in no time became applicable to the industrial sector.
Government Involvement and Tariffs
The President determines that any current duties or other import restrictions of any foreign country or the United States are unduly burdening and restricting the foreign trade of the United States, may proclaim modification or extension of any existing responsibility, as he determines to be required or appropriate to carry out any such trade agreement. The President is urged to take all appropriate and feasible steps within his power to harmonize, reduce, or eliminate such barriers to international trade. Notwithstanding any other provision of law, no trade benefit shall be extended to any country by reason of the extension of any trade benefit to another country under a trade agreement entered into under paragraph with such other country that provides for the elimination or reduction of any duty imposed by the United States. Before the President enters into any trade agreement, he needs to consult with the Committee on Ways and Means of the House of Representatives, the Committee on Finance of the Senate, and with each committee of the House and the Senate and each joint committee of the Congress which has jurisdiction over legislation involving subject matters which would be affected by such trade agreement. ( ref 13 )
Understanding supply and demand
Trade items and retaliation from trade partners ( ref 13)
The history of steel import restrictions by the United States dates back to the 1960s. Because of their strong position in the market, U.S. steelmakers used to have significant power to control prices. In the early 1960s, it was quite easy to pass on increased costs onto prices, and thus raising employee wages was not difficult. However, on the other side of the same coin, they were beginning to lose competitive advantage, lagging behind their foreign rivals in investing in continuous casting facilities and technology development. This resulted in higher domestic steel prices and a boost in imports. Responding to calls from the domestic steel industry, the administration of President Lyndon Johnson had Japan and the European Community agree to “voluntarily restrict” U.S.-bound steel exports. More than half a century later, the United States has repeatedly implemented various measures to curb steel imports, including voluntary export restrictions on the part of trading partners, anti-dumping duties, the trigger price mechanism (TPM) designed to inhibit steel imports below set prices, and countervailing duties intended to neutralize the effects of subsidies. However, the import restrictions invoked on March 23, 2018 differ from those before implemented safeguard measures in citing national security as the reason for their imposition. As an internationally accepted exception, a WTO member may take “any action which it considers necessary for the protection of its essential security interests.” However, the scope of the applicability of this exception is understood as being very limited. Indeed, action under the Section 232 of the Trade Expansion Act has been taken only in eight cases, all of which are oil-related, with import restrictions imposed in only five of them. A broad range of industries, including high-tech and scarce resources development, are perceived to be related to national security. Why did the United States pick only the steel and aluminum industries as being applicable to protection on the grounds of safeguarding national security? The question is all the more relevant given the fact that there are very few industries for which the entire production process is completed within a single country in today’s world where
such processes are distributed globally with most industries integrated into global production networks. As far as judging from the U.S. Department of Commerce’s reports on the Section 232 investigations on the effects of steel and aluminum imports (2018), there is no convincing reason why only the steel and aluminum industries are regarded as having been exposed to and weakened by competition with imports and thereby threatening to impair national security. If increasing imports are causing a decline in the competitiveness of the domestic steel and aluminum industries and thereby threatening to impair national security, the same should apply—to quite a considerable extent—too many other goods and services, and other countries would use the same reasoning to justify the imposition of trade restrictions. As a result, unilateral import restrictions on the grounds of safeguarding national security would propagate to many other industries and other countries. It is a well-known fact that the Tariff Act of 1930, commonly known as the Smoot-Hawley Tariff Act, was introduced with the intention of
protecting farmers in the Midwest but in no time became applicable to the industrial sector
Ref 2The Trump administration’s plans to impose $50 billion in tariffs on Chinese imports, as well as tariffs recently placed on imported steel and aluminum, mark a distinct break from decades of U.S. trade policy, which long has generally favored lower tariffs and fewer restrictions on the movement of goods and services across international borders. U.S. average tariff rates have consistently been at or near their lowest levels in the nation’s history; today, they’re also among the lowest in the world. If the easing of international competitive pressure is the sole purpose, the latest import restrictions will do more harm than good, resulting in higher domestic prices for steel and aluminum and causing a further delay in renewal efforts. Furthermore, other segments of the economy will suffer, such as aluminum industries will have some significant negative effects. While higher steel and aluminum prices are good for producers, those using them as intermediate goods will suffer higher prices. However, steel and aluminum users are no ordinary consumers but rather manufacturers such as automakers. An increase in the prices of intermediate goods means higher marginal costs for user industries, eroding their competitiveness and reducing jobs.
4. Cycle of retaliation
The import restrictions imposed by the United States on the grounds of protecting national security aims not only to safeguard the domestic steel and aluminum industries but also to extract favorable terms in negotiating with its trade partners to open their markets and expand U.S. exports. We can see this from the fact that the United States excluded some trade partners—those poised to compromise— from the steel and aluminum tariffs.
We all know that balancing trade between two countries is contradictory to the multilateral trade regime and that a country’s trade and current account balance with the rest of the world can be achieved by macroeconomic management that controls the balance between savings and investment (or between aggregate supply and demand) within the country. Despite all of this, the United States is demanding its trade partners to correct bilateral trade imbalances, probably as a negotiating tactic to wring greater concessions from its trade partners in opening their markets.
Beside the import restrictions under Section 232 of the Trade Expansion Act, the Trump administration also announced a plan to impose tariffs under Section 301 of the Trade Act of 1974 on 1,300 items of high-tech and other products from China, worth $50 billion in total, in a move to punish the country for infringing intellectual property rights. Obviously, both measures are unilateral action by the United States and not acceptable under WTO rules. What lies behind this is its frustration with China, unable to see any tangible results after years of efforts to urge Beijing to open its market and take action to prevent intellectual property infringements.
The United States is the world’s largest market. The tactic of negotiating trade deals to its advantage by threatening to close its huge market has not been without success. In the 1980s, the United States urged Japan, which was then running a significant bilateral trade surplus, to voluntarily restrain auto exports to, and expand semiconductor imports from, the United States by using Section 301 of the Trade Act as a negotiation tool. From fear of getting blocked out of the U.S. market, Japan conceded. However, as it turned out, those developments triggered momentum that led to the creation of the WTO and hence the prohibition of unilateral action. Having acceded to the WTO in 2001, China is entitled to enjoy the benefits of free trade, and its economy has expanded to the extent that it may soon overtake the United States. Taking advantage of where it stands today, China announced its intention to fight back against the United States, citing the relevant rules of the WTO. In retaliation for the U.S. restrictions on steel and aluminum imports, China imposed 15% tariffs on 120 items of U.S.-made products—including nuts and wine—worth $1 billion, and 25% tariffs on eight additional items— such as pork and aluminum scraps—worth $2 billion. Furthermore, in response to the U.S. imposition of 25% tariffs on the 1,300 made-in-China high-tech and other products worth $50 billion, Beijing expressed its readiness to impose 25% tariffs on 106 items—mostly agricultural products such as soybeans, corn, wheat, and beef—worth $50 billion. This prompted the Trump administration to announce a plan to raise tariffs on additional import items from China worth $100 billion as a sanction for intellectual property infringements. If all of those tit-for-tat measures turn into reality, the trade friction between the two countries would go far beyond a squabble and inevitably escalate into a full-fledged trade war. In the past, the U.S. unilateral action under the Smoot-Hawley Tariff Act of 1930, which raises tariffs on numerous items, prompted its trade partners to do the same in retaliation, eventually resulting in the collapse of the world trade system. We must not repeat this tragic mistake.
Autos and Parts: Industry Rationalization
U.S. autoworkers were concerned that free trade with Mexico would eliminate their jobs, either due to cheaper auto imports from Mexico or to U.S. auto companies relocating to Mexico. put the auto industry near the top of their “endangered jobs” list. The mainstream economic predictions argued that NAFTA would increase U.S. exports of autos and parts to Mexico, with smaller increases in U.S. imports, because Mexico had higher initial tariffs. ( Burfisher) Mexico had extensive misrepresentations in the domestic automobile sector prior to NAFTA through its “auto decrees” which included requirements for domestic content and the trade balance, limits on imports of new vehicles in relation to total sales, prohibition on importing used cars, and restrictions on foreign ownership of the auto parts industry. As part of NAFTA, Mexico agreed to phase out the auto decrees, improving U.S. competitiveness in the Mexican market. NAFTA also includes rules of origin which specify that to qualify for favored tariff treatment, a vehicle must have 62.5 percent North American content. ( berfisher) The changes in these regulations and the strong rules of origin created the potential for the significant reasoning of the production process among the three NAFTA countries. On the other hand, U.S. welfare and employment would decline as a result of rationalization, as production shifted to the technologically competitive Mexican facilities. There is strong evidence of increased integration in the North American auto industry which has made U.S. parts and vehicle manufacturers more efficient. Prior to NAFTA, the United States was already a net importer from Mexico in vehicles and parts. One reason for increased Mexican exports is that U.S. producers are using their Mexican plants to supplement U.S. production to meet the high U.S. demand in a strong economy. U.S. exports of auto parts also rose dramatically, by 30 percent. (berfisher). As the U.S. Trade Representative notes, U.S. imports of vehicles assembled in Mexico include a high percentage of auto parts made in the United States. Having an open trade agreement allows for increasing employment in the American automotive industry, which grew by 14.1 percent overall, with an increase of 16.1 percent in the auto parts sector and 10.1 percent in the motor vehicle assembly sector from 1994-1996. The newly imposed tariffs will decrease employment in the American auto industry. (ref 1)
Impact on user industries and job losses ( ref 14)
The latest import restrictions are aimed to ease international competitive pressure on the U.S. steel and aluminum industries, and not likely to have any effect in stimulating the industries. The U.S. steel industry has long been protected from international competitive pressure but remains far from being revitalized today. Some companies may move production bases to other countries to avoid higher costs of intermediate goods. Protecting the domestic steel and aluminum industries would put a greater burden and job losses on the part of the user industries, deteriorating the economic welfare of the United States. The impact of such negative effects will be more serious on companies exposed to higher competition and may prompt those in the user industries to call for similar import restrictions. Alterations in domestic prices caused by import tariffs impact not only producers but also users. If reviving the domestic steel and aluminum industries is the policy goal, the U.S. administration should pursue policy measures that would impact only producers, such as those designed to encourage capital investment, promote research and development (R&D), provide training to workers, and enhance infrastructure in areas home to steel and aluminum makers to help improve productivity.
Ref 1 Conclusions
Recently, U.S. trade policy has become a much more politically sensitive topic. Legitimate fears by affected industries and labor about the adjustment costs need to be addressed in the political arena if the world is to continue the trend of trade liberalization that has been a consistent goal of U.S. foreign policy since the end of World War II, a goal that has been supported by the vast majority of the economics profession. In this broader context, the NAFTA
experience offers several lessons. First, economists can do a reasonably good job of projecting the gains from trade liberalization agreements. The mainstream forecasts during the NAFTA
debate were basically correct: NAFTA has had relatively small positive effects on the U.S. economy and relatively large positive effects on Mexico. The only blemish marring this otherwise exemplary use of economic analysis in a policy debate was the occasional use of mercantilist arguments that attempted to infer the effect of trade liberalization by applying simple multipliers to projected bilateral trade balances. Such methods are inappropriate for the analysis of the benefits and costs of trade liberalization and were criticized during the debate.
Second, a debate over the effects of removing trade distortions should not discuss the aggregate trade balance. Regional trade liberalization primarily affects resource allocation, production, and trade patterns. While regional trade agreements may affect bilateral trade balances, a country’s aggregate trade balance is determined primarily in asset markets. The only way a regional trade agreement can affect a country’s aggregate trade balance is if it signals a country’s commitment
to an open development strategy and therefore raises investor confidence. In this context, NAFTA probably affected Mexico’s aggregate trade balance and helped ameliorate the effect of the peso crisis on capital flows. However, there is no discernible effect of NAFTA on the U.S. aggregate trade balance. Third, realizing benefits from any trade agreement (or indeed, from any
technological change) necessarily involves shifting resources across sectors, which in turn will involve adjustment costs, especially for labor. While the amount of adjustment required under NAFTA was small relative to normal labor turnover, the Clinton administration anticipated labor dislocation and extended Trade Adjustment Assistance. Globalization appears to be speeding structural changes in many economies, and there is clearly scope for developing policies that facilitate and smooth the adjustment process. Fourth, free trade agreements can accelerate domestic reforms of policies that distort prices because countries can no longer maintain substantial price differences when they open borders. In this capacity, regional trade agreements can serve as a building block towards multilateral liberalization. They force countries to
eliminate domestic distortions that are incompatible with free trade, whether regional or globa