US importers must pay a steep tariff on steel from the EU, Canada and Mexico as of today, under new levies that have sparked fears of a global trade war.
UK International Trade Secretary Liam Fox said that Donald Trump’s tariffs of 25% on steel, and 10% on aluminium, was “patently absurd”, while French president Emmanuel Macron told the US president over the phone that the tariffs were “illegal”.
The EU, Canada and Mexico have already announced plans for retaliatory tariffs on US goods, opening the door to the prospect of a tit-for-tat trade war with serious ramifications for the world economy.
What is a tariff?
A tariff is a tax imposed on imported goods when they enter a country, either as a fixed additional cost per unit or as a percentage of their value.
Before the widespread introduction of income tax, tariffs were one of the main instruments available to governments to raise revenue.
However, “the main purpose of a tariff these days tends to be about protecting particular domestic industries from foreign competition”, says Amitrajeet A. Batabyal, an economics professor at the New York State-based Rochester Institute of Technology, in an article on The Conversation.
Depending on the economic clout of the countries involved and the size of the affected industries, tariffs can upend national economies and even affect global trade.
Why steel?
Protecting domestic manufacturing jobs was a major plank in Trump’s “America First” campaign during the presidential election, and the steel industry is one of the sectors most seriously affected by competition from cheaper overseas suppliers.
By introducing the new levy, Trump “joins a long list of presidents going back to Richard Nixon who’ve sought to use tariffs and other restrictions to protect a long-ailing US steel industry whose heyday ended decades ago”, says financial news site MarketWatch.
What are the pros and cons of tariffs?
Tariffs are a key tool of the economic policy known as protectionism, which seeks to protect national industries from overseas competition.
In theory, artificially inflating the cost of imported goods encourages businesses to buy domestic, preventing national industries from being undercut by cheaper foreign labour.
Left-wing advocates see protectionism as a means of protecting workers from a “race to the bottom” in which employers slash wages and benefits in order to compete with emerging economies.
However, while American steel and aluminium workers may welcome the new measures, consumers are likely to be less enthusiastic, as import-reliant businesses affected by the tariffs are likely to pass on increased production costs to customers.
The higher costs of production could also spell trouble for workers in businesses reliant on imported steel or aluminium.
“Studies found that the most recent steel tariff imposed by President George W. Bush in 2002 resulted in as many as 200,000 jobs lost in industries that use steel to make their products,” says Business Insider.
In addition, in a globalised marketplace, a move towards protectionism in a major economy such as the US risks causing severe disruption to world trade, as trading partners impose their own retaliatory tariffs.
The Confederation of British Industry’s international director, Ben Digby, has warned that such a trade war “will damage prosperity on both sides of the Atlantic”.
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