Trump’s Steel Tariffs Raise Fears of a Damaging Trade War

WASHINGTON — After making good on tax cuts and regulatory rollbacks that business leaders wanted, President Donald Trump has turned to a part of his economic agenda that many of them feared: tariffs.

Those leaders worry that Trump, by imposing stiff and sweeping tariffs on steel and aluminum, will set off a trade war with other countries. The global tit-for-tat could hurt U.S. exporters and raise costs for manufacturers that rely on a vast supply chain around the world.

If that happens, it will crimp economic growth, undermining the stimulative effects of Trump’s deregulation push and his signature $1.5 trillion tax cut.

The odds of such an outcome appear to be rising, prompting congressional Republicans to push Trump in public and in private to reconsider. “If the president goes through with this, it will kill American jobs — that’s what every trade war ultimately does,” Sen. Ben Sasse, R-Neb., said Friday. “So much losing.”

Trump is not having any of that criticism, saying on Twitter on Friday that “trade wars are good, and easy to win.”

That’s not how trade wars usually go.

Even the prospect of a trade war could hurt the economic expansion underway. That’s because any uncertainty can prompt companies to curtail investment or hold off on hiring.

If other countries follow up on their threats to retaliate, the pain could be significant. Beyond tariffs, their tools include taking strategic strikes at certain industries or taking their grievances to the World Trade Organization.

Any actions threaten the global supply chains on which the U.S. economy is heavily dependent. The number of workers who will lose out if countries are cut off from America far exceeds the number who stand to gain from the pending tariffs.

“Industries that buy steel and aluminum, not to mention agricultural exporters, employ many times more people than the industries that the president wants to protect,” said Peter A. Petri, an economist and trade expert at Brandeis University’s International Business School. “Whether we go through with his approach is anyone’s guess, but business investment depends on predictable policy, and relentless chaos takes its toll even if cooler heads prevail on the policies that the president is tweeting about.” Trump’s planned tariffs would levy a tax of 25 percent on imported steel and 10 percent on imported aluminum. The goal is to counter China, Russia and other countries that have flooded the global markets with cheap products and made it harder for the U.S. steel industry to compete.

If put into effect, the tariffs would raise the price of steel and aluminum, squeezing automakers, beverage manufacturers and other industries that buy a lot of those materials. That would increase prices for consumers, kill some jobs in those industries or both.

The tariffs would almost certainly provoke a response from America’s trading partners — and not just China and Russia, because they would apply to every other country. On Friday, the European Union threatened to retaliate by imposing tariffs of its own on some goods from America, including bluejeans, bourbon and motorcycles.

If the back-and-forth stopped there, the U.S. economy would lose 0.1 percent of its output this year, said Mark Zandi, chief economist at Moody’s Analytics. That loss would cost the country 190,000 jobs.

What worries many economists is the prospect that the retaliation will go even further. A cycle of increasingly harsh tariffs would slam the brakes on global growth.

Here is one way the dispute could worsen: By provoking responses from Canada and Mexico, the tariffs could derail the renegotiation of the North American Free Trade Agreement. Trump could pull the United States out of that agreement, which would erect new and damaging trade barriers on agricultural exports from states such as Iowa. Another possibility is that other countries could file complaints with the World Trade Organization. The WTO could declare that the tariffs violated global trading rules, but the Trump administration, which has marginalized the organization, could choose to ignore it.

Such a move would stir chaos in the global trading regime. It would be like ejecting the referee from a playoff basketball game. A free-for-all could ensue, with countries levying tariffs or subsidizing domestic exporters in ways the WTO would never allow.

Zandi estimates that a NAFTA breakdown would cost the United States 1.8 million jobs. He calculates that a full global trade war, while far less likely, would carry much higher risks, including nearly 4 million lost American jobs.

“The economic fallout from such a war could be serious,” he said, “ending in a global recession.”

Others expressed less concern: In an era of globalization, the talk of retaliation may be stronger than the actual action. And some economists, particularly those on the left, even saw a possible bright side.

Jared Bernstein, an economist in the Obama administration who is now at the Center on Budget and Policy Priorities, expects some counter-tariffs, maybe from China on food products.

“You always hear trade war at these moments,” Bernstein said. “That doesn’t mean that’s always wrong, but it usually is.”

Thea M. Lee, a trade economist and president of the Economic Policy Institute, a liberal think tank, said the tariffs could actually help global markets. They would punish countries that overproduce steel and aluminum, she said, and bring stability and certainty to producers of those metals in the United States.

“It’s not actually in anybody’s interest to spiral downward and get into a massive retaliatory situation,” Lee said. “I think there will be some immediate reactions, but I don’t think it will spiral out of control.”

From the beginning of his insurgent 2016 presidential campaign, Trump has seen “winning” on trade as critical for the economy. Reducing trade deficits, he has argued, will work in tandem with lowering taxes and reducing federal regulations to supercharge growth.

Trump took several steps last year to freeze or roll back regulations, and he signed a $1.5 trillion tax-cut bill in December. He also took initial steps to reorient trade policy, pulling out of the Trans-Pacific Partnership and embarking on the fractious renegotiation of NAFTA.

While economic growth accelerated, the trade deficit in goods and services widened to $566 billion last year, the largest amount since 2008. The goods deficit with China hit $375 billion, a record.

The tariffs Trump announced Thursday were his boldest move yet on trade. They were also a reminder to the Republican establishment that his theory of the economy is sometimes at odds with traditional free-market conservatism, despite much overlap.

On Thursday, the conservative Wall Street Journal editorial board called the tariffs the “biggest policy blunder of his presidency.” The top two Republicans in Congress — Senate Majority Leader Mitch McConnell, and House Speaker Paul Ryan — were imploring Trump privately to reconsider. Trump, though, casts himself as protecting an industry that he sees as endangered. Raw steel production in the United States remains higher than it was 25 years ago, but it is down significantly from the 1970s. Just under 140,000 Americans work in the steel industry, according to the American Iron and Steel Institute.

While Trump’s stand is likely to give him a boost in industrial states like Ohio and Pennsylvania, which were both key to his 2016 victory, a trade war may harm other manufacturing strongholds that are home to his base voters.

Last year, researchers at the Brookings Institution’s Metropolitan Policy Program reported that smaller metropolitan areas would be disproportionately hurt by a trade shock. The 10 that were most vulnerable, because of their economic reliance on exports, were in Indiana, Texas, Louisiana, South Carolina and Alabama — all states Trump carried.