Trump's "trade war"

I have hesitated to comment on Trump's plans to put import duties onto steel and aluminium  -- but his plans have so few defenders that I think I should point out a few things that are being overlooked.  For a start, this is NOT a great departure from normal GOP thinking.  George Bush II did the same for a time. The steel business is a chronic political problem worldwide. I will say why below. And there is certainly nothing new about this from Trump.  He campaigned on a policy of using tariffs to protect American industry. So he has a very clear mandate for what he is doing.  And his rationale that small price increases on consumer goods are worth it to save communities applies here.

And Trump's own comment that trade wars are easy to win is instructive.  It suggests that his tariffs are just a bargaining tool and a temporary one at that.  So any long term damage is avoided.

And what about political damage?  He is such a big winner there that he could well be prepared for substantial damage in other directions.  The working class liking for Trump could now well become ecstatic in many quarters.

But to get back to economics, this is a well-known problem.  It is known as a "dumping" problem and Trump is being perfectly orthodox about it.  A dumping problem arises when a country produces more of a good than can readily be sold. And steel is almost continually in that situation.  Because it is such an icon of industrial maturity, almost every country everywhere wants to have a steel mill and governments everywhere support the building of them.  So steel is chronically in glut, oversupply.  China has a big surplus but so does Canada, Europe etc.

So what to do when nobody wants to buy your product?  Easy!  Discount it.  But you have to be careful about doing that or you may be selling your product for less than it costs to make. But with government support your home market is captive so you apply discounts only to stuff you sell overseas, leaving your home market as a survival revenue source.

So if China were selling Americans Chinese steel for less than it costs to make, you might think Americans would celebrate:  China is giving us a gift!  And some economists think we should look at it that way.  But nobody does. The Chinese steel will now be replacing steel made in America and the American steel millers will be up in arms.  They will demand that their government put a tax on all the imported steel so that any discounts are cancelled out.  And that is basically what Mr Trump is doing.  He is keeping out all that foreign steel so that American steel millers can sell their stuff.

But there are problems.  China has in fact been quite restrained and has not raided the American market.  It is those nice Canadians who sell most of the "foreign" steel marketed in America.  Do we really want to shaft them? If we do they could retaliate. They could, for instance, buy their military aircraft from Europe rather than America.  They have already cancelled their F35 order and the Super Hornets could be next. And the latest Saab Gripen E would make a very nice alternative.

But Trump is undoubtedly cooking up a deal of some sort so we will have to wait and see.  My best guess:  He will be "persuaded" to replace his new tariffs with a system of national quotas -- with the largest existing international suppliers getting the biggest quotas and the smaller suppliers getting no quota at all.  Good for Canada, bad for China, only a little bit bad for American consumers, great for the mid-terms.

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