The White House’s war over steel tariffs, explained

The move sparked an internal feud at the White House. Then the stock market plunged.

The Trump administration may have finally launched the trade war many expected was coming.

President Trump announced plans to impose a 25 percent tariff on all steel imports and a 10 percent tariff on aluminum imports — a move that will likely anger US trading partners and American businesses that buy steel. Wall Street panned the move, with the Dow falling more than 500 points in the hours after Trump’s statement.

The announcement came amid a fierce fight within the White House over the proposed tariffs, according to CNBC. News reports Thursday morning said that Trump would disclose the new policy later in the day. Then the announcement was reportedly postponed. Finally, at a White House meeting with steel executives, Trump said that the tariffs would indeed be implemented. “We’ll be signing it next week,” he told the group, according to a pool report. “And you’ll have protection for a long time in a while.”

The dispute pitted free trade advocates, such as chief economic adviser Gary Cohn, against trade hawks like White House adviser Peter Navarro.

In the end, the trade hawks won. The Commerce Department will impose the tariffs under a rarely used law that allows emergency trade sanctions for “national security.”

Protecting the US steel industry from foreign competition has been a top priority for Trump's trade team since day one. They’ve framed the issue as a fight to preserve jobs for American steelworkers, who have seen their jobs disappear as a result of automation and globalization.

Coincidentally (or not), Trump's trade team has deep ties to the US steel industry, and Commerce Secretary Wilbur Ross made his fortune investing in distressed steel companies. (It’s also worth noting, as Vox’s Matthew Yglesias points out, that the Metals Service Center Institute, a trade group that favors anti-import measures, held last year’s annual conference at the Trump Doral resort in Miami.)

It’s not unusual for presidents to target certain imports that harm US industries — Barack Obama slapped duties on certain Chinese steel imports in 2016 — but the new tariffs go much, much further.

The tariffs are great for US steelmakers — but they’re bad for a large part of the US economy that relies on steel, like construction companies, automakers, and appliance manufacturers. The stock market took a dive after the announcement, and business groups, such as the Business Roundtable, warned Trump that the tariffs would backfire if other countries retaliate with tariffs on American products.

That’s why some White House advisers pushed back against the idea too. But the announcement, and the internal tug-of-war over the policy, underscores the Trump administration’s lingering identity crisis on trade: Will “America First” protectionism define the Trump presidency, or will modern Republican free-market policies win?

This is really a trade war with China

Trump went hard after China during his campaign, blaming it for a host of American economic ills and promising to be tough on the Asian superpower. The steel tariffs are the first real step he’s taken to fulfill that promise.

While the new tariffs don’t single out any one country, Chinese steelmakers are clearly the main target. After all, they produce about half of the world’s steel.

American steelmakers have long accused China of harming their industry by flooding the United States with cheap steel imports. This is known as “dumping” — selling a product at a cheaper price in one country than at home or in another country. This often hurts a country’s domestic producers and workers, so the World Trade Organization believes it’s fair for countries to levy tariffs to level the playing field with global competitors.

Previous administrations have levied anti-dumping duties on Chinese steelmakers. In March 2016, the Obama administration levied tariffs of more than 200 percent on certain Chinese steel products, but that only dampened Chinese steel exports slightly. Shortly after taking office, the Trump administration announced that a new wave of tariffs was coming on low-priced Chinese steel sheeting.

But these measures tend to have little effect, according to mainstream economists. Chinese producers can get around such restrictions by shipping steel to a third country before exporting it to the United States.

So Trump and Ross decided to take extreme measures, dusting off the 1962 Trade Expansion Act, which allows emergency trade sanction for “national security” reasons.

President Trump in April 2017 ordered an investigation into the national security implications of foreign imports of US steel. Days later, he signed a memorandum for a similar investigation on aluminum. Both were efforts undertaken by the Commerce Department under Section 232 of the law, which has only been used twice, most recently in 1981.

In January, the Commerce Department investigation concluded that cheap foreign steel was indeed a threat to America:

The continued rising levels of imports of foreign steel threaten to impair the national security by placing the U.S. steel industry at substantial risk of displacing the basic oxygen furnace and other steelmaking capacity, and the related supply chain needed to produce steel for critical infrastructure and national defense.

It’s unclear to what extent the Trump tariffs will boost domestic steel production. Free-trade economists say these types of moves don’t do much to protect workers, and anything that raises the price of steel hurts other American industries.

Restricting imports is not going to bring back steel jobs

While cheap imports likely hurt American steelworkers, economists believe they’re hardly the main cause for the decline of the steel industry.

Low demand for steel and decades of automation are the main reasons jobs at American steel mills are disappearing, and no amount of tariffs on Chinese steel can change that tide, economists told me.

“The deal with these kinds of protections is that they don’t change long-term trends,” Michael Moore, an economics professor at George Washington University, told Vox shortly after Ross started the steel investigation. “The thought that a 55-year-old worker is going to keep their job because you put a tariff on imports is ridiculous.”

Moore worked at a Texas steel mill in the late 1970s, when there were plenty of steel jobs that paid the equivalent of $30 an hour. But machines now do much of the assembly line work that he did. “Many of the guys I worked with have lost their jobs,” he said. “Back then, it took 10 workers to make a ton of steel. Now it takes one.”

And it’s unlikely that tariffs are going to put the brakes on Chinese steel production.

Chinese companies are able to sell steel cheaply in the US because China produces enormous amounts of it.

Construction of massive steel mills started in the late 1970s, as the Chinese economy opened to the outside world and record growth and industrialization lifted 800 million people out of poverty. It was a time when construction was booming in China.

“When you are moving hundreds of millions of people from villages into cities, you need to build highways and apartments and infrastructure,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics in Washington, DC. “When [their economy] was growing 10 percent per year, they needed all that steel.”

Starting in 2010, the Chinese economy began to slow down and its need for steel diminished. But Chinese steel production didn’t slow down in response — creating a glut of steel in the global marketplace that lowered prices and threatened steel mills across the globe. International steel prices plummeted from more than $500 per ton in 2012 to $50 a ton in 2016.

There’s no way to track how many workers lost their jobs as a result, but in recent years, factories in Europe and Mexico laid off thousands of steelworkers. In the United States, which is the world’s second-largest steel consumer, the steel giant US Steel in 2016 announced that it was laying off a quarter of its salaried workers.

Countries can punish dumping to protect businesses and jobs

Dumping isn’t illegal. But under US trade law and WTO rules, it’s fair game for America (and other countries) to slap tariffs on underpriced imports from certain companies if they can prove it’s harming local industries. Usually, the Commerce Department will levy tariffs on all companies in the country that export the same product to the United States, though the tariff can vary from one company to the next. The idea is that the penalty will protect American manufacturers and keep them competitive in the United States.

The problem for American steel companies: Anti-dumping laws seem to have little impact. In the past three years, the US steel industry has brought more than a dozen such cases to the Commerce Department and the US Trade Commission — some leading to tariffs of more than 500 percent on certain Chinese steel products used to make cars and appliances.

While that may have stopped American companies from importing some Chinese steel products, that doesn’t necessarily mean they are now buying American steel. They can still get cheap steel elsewhere, like Vietnam or India.

The new 25 percent tariff on all steel imports appears to be a way to prevent American businesses from doing that. But it will also upset China, which could retaliate by restricting American products from its market.

Two weeks ago, China’s Ministry of Commerce blasted the national security investigation and warned that the country “will definitely take necessary measures to safeguard its legitimate rights” should President Trump decide to follow the tariff recommendations.

The new tariffs may well be the first strike in Trump’s trade war with China.

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