Trump's Steel Tariffs Have Hit Smaller and Poorer Countries the Hardest

Chad P. Bown (PIIE), Euijin Jung (PIIE) and Eva (Yiwen) Zhang (PIIE)

November 15, 2018 3:45 PM
Photo Credit: 
REUTERS/Fayaz Aziz

Authors’ Note: Thanks to Douglas Irwin, Nuno Limão, and Thomas Prusa for useful comments. All remaining errors are our own.

President Donald Trump’s steel tariffs hit almost all US trading partners large and small with the same penalty: a 25 percent duty on imported steel. The main victims included China, Canada, Mexico, and the European Union—all of which then retaliated as part of Trump’s trade war. But a little-noticed and little-appreciated aspect of these particular tariffs is that they also hurt smaller and poorer steel-producing countries—and inflicted pain on them disproportionately.

The disparity of impact highlights two disturbing developments. First, Trump’s rationale for acting against major trading partners like China has been to protect US national security. But importing steel from smaller producers in Bangladesh, Guatemala, or Peru could not possibly be considered a national security threat. Thus, Trump is hitting these more vulnerable countries with no stated policy goal.

Second, Trump’s actions once again violate norms that the United States helped establish at the World Trade Organization. WTO members had explicitly committed themselves to shield vulnerable, innocent bystanders from the fallout of protectionist actions. Trump’s tariffs on the poor are yet another such commitment discarded by his version of America First—this one receiving little fanfare because of the identity of the affected countries.

Trump’s tariffs have impacted US imports and foreign exports of steel

A significant irony of Trump’s trade war is that, because of strong US economic growth, total US imports of steel actually increased by 2.2 percent in the first full six-month period after Trump imposed 25 percent tariffs on March 23.[1] But this uptick in steel imports masks some very divergent impacts found beneath the surface.[2]  

To begin, the effect of the tariffs depends on whether they are measured from the perspective of a US consumer or a foreign producer.  Contrary to Trump’s argument that his tariffs are only hurting exporting countries, the tariffs have also hit US consumers. The tariffs drive a considerable wedge between the prices that US consumers (importers) pay and that which foreign producers (exporters) receive.[3] Consider figure 1.

US consumers have seen price increases on imported steel of 14.7 percent relative to the period before the tariffs. Yet according to data assembled here, the foreign exporters of steel have received only a 2.4 percent price increase over that same period.[4]

Figure 1 Percent change in US imports and foreign exports of steel over the six months prior to and following Trump’s imposition of tariffs on March 23, 2018

Small and poor countries have borne the brunt of Trump’s tariffs

Trump’s tariffs have hit poorer countries much harder than the rich but for reasons that are not yet clear. One contributing explanation is that their smaller scale means thinner profit margins. They may have less ability to absorb potential price reductions associated with Trump’s tariffs, perhaps because US consumers are less willing to accept price increases that they might seek to pass along.

Whatever the cause, the data show a significantly disparate impact.  Consider a group of 29 countries that collectively made up 4.1 percent of US steel imports in 2017 but in which no individual country had a share of the US steel import market larger than 1.25 percent.[5] These countries are also relatively poor; on average, their income per capita in 2017 was $4,568. For comparison, US income per capita in 2017 was $58,270.

Consider the top panel of figure 2 which illustrates percent changes in trade flows in the six months after Trump’s tariffs went into effect on March 23 relative to the previous six months. These small and poor countries sent fewer exports by volume to the United States, at reduced prices, and thereby earned less revenue. Export volumes dropped by a precipitous 12.1 percent; this decline runs counter to the general trend of the overall increase of 2.2 percent found in figure 1. Furthermore, the prices the exporters in those poorer countries received for their sales to the United States decreased by 3.9 percent. Falling prices and declining export volumes combined to reduce the revenue earned by 15.5 percent, or $100 million, from their steel exports relative to the previous six-month period.

Figure 2 US imports and foreign exports of steel over the six months prior to and following Trump’s imposition of tariffs on March 23, 2018, by exporting country group

Compare the experience of small, developing countries with a collection of larger or richer countries that Trump also hit with tariffs starting March 23. This second group includes countries like China, India, and Russia; collectively they made up 28.9 percent of US steel imports in 2017. The countries were also richer, with an average income per capita in 2017 of $26,581.

Figure 2 illustrates the difference. Despite also being hit with Trump’s tariffs—of the same size and at the same time—these other countries’ steel exports to the United States increased by 11 percent. The prices they received for those exports also fell, just as for the smaller countries, but only by 2.4 percent. And the export revenue of the larger or richer countries actually increased by 8.3 percent, or $305 million. There is thus a 23.8 (23.1) percentage point differential trade performance in revenues (volumes) between the small developing countries and this main comparator group of exporters.

A final group in figure 2 involves the countries not immediately hit by Trump’s tariffs on March 23: Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea. This group made up 67 percent of US imports in 2017 but is not useful for comparing trade impacts since they were all exempted from Trump’s tariffs for at least a part of the six-month period.[6]

Figure 2 indicates that while the export volumes of these economies were flat, their exporter-received prices were 4.7 percent higher than during the prior period. Again, the average price gains for these exporters likely arose because, between March 23 and May 31, Trump had imposed import restrictions on all other countries, which put upward pressure on consumer (import) prices for everyone (see also figure 2). And yet because exports from these seven economies were not subject to tariffs, they were able to keep the benefits of the consumer price hike for themselves.[7] The impact of this was a 4.7 percent increase in their export revenues, or $478 million.

Smaller countries may also suffer disproportionately if Trump’s tariffs lead them to exit

The reduction of trade from smaller developing countries could have taken one of two forms: a reduction in export volumes or a complete exit from the US market. Given the fixed reentry costs to reestablish contacts, trust with buyers, and a distribution network, exit due to Trump’s tariffs is likely to have an even more negative longer-term effect than a simple reduction in export volumes.[8]

In the six-month period following the tariffs, 5 out of the 27 small developing countries that had exported steel products in the prior six months did not export to the United States.[9] While not too different from the 5 out of 24 countries exiting in the comparison group, exporter exit in smaller countries remains a concern worth monitoring.

The timing of Trump’s tariff exemptions meant Argentina, Brazil, Canada, Mexico, and the European Union enjoyed preferential access to the US steel market during April and May. While that preferential access was eventually eliminated, it may have contributed to a more permanent and negative impact for those who first bore the brunt of tariffs—the exporters in smaller and poorer countries.

WTO rules were designed to help shield small and poor country exports from disparities caused by tariffs

For small, developing countries, it was not supposed to be this way. In their view, if Trump had followed the standard rules for implementing trade protection as a “safeguard”—instead of as a tariff that he has stated is necessary to protect America’s national security—then their exports would likely have been shielded.[10]

If Trump had imposed a tariff instead under Section 201 of the Trade Act of 1974, he would have been expected to follow the rules of the WTO’s Agreement on Safeguards Article 9.1, which states:

Safeguard measures shall not be applied against a product originating in a developing country Member as long as its share of imports of the product concerned in the importing Member does not exceed 3 per cent, provided that developing country Members with less than 3 per cent import share collectively account for not more than 9 per cent of total imports of the product concerned.

Had Trump followed these provisions, the smaller, developing countries illustrated in figure 2 would not have been hit with the tariffs and likely would not have suffered the same adverse impact on their trade.

Trump did follow these basic provisions when he imposed safeguard tariffs on solar panels and washing machines under Section 201 in January 2018.[11] President George W. Bush did the same when he imposed a tariff on a similarly large amount of steel imports under Section 201 in 2002.[12] President Clinton also exempted small, developing country suppliers when imposing safeguard restrictions on lamb meat, brooms, and wheat gluten in the 1990s.[13]

It is also notable that Trump has applied these steel tariffs on small, developing countries without any stated policy objective. Though his messaging has been inconsistent, Trump has given some explanation for imposing tariffs on China—i.e., unfair trade, overcapacity, or subsidies. For tariffs on other major economies, he has claimed the tariffs are for bargaining leverage. At the October 1 White House announcement of the new US–Mexico–Canada Agreement (USMCA), Trump stated, “By the way, without tariffs, we wouldn’t be talking about a deal.” [14] He also sees his tariffs as having been a useful stick to convince otherwise hesitant Japan and the European Union to start bilateral trade talks.

But Trump’s tariffs on smaller, poorer countries have gone undefended and unexplained.

Developing countries have few policy options to respond to Trump’s tariffs

Trump’s steel tariffs leave little immediate recourse for developing countries suffering a sudden loss of access to the US market. They could choose to file a WTO dispute, but none have done so yet. And because most are small consumers of US exports, deploying the counter-tariff approach of the European Union, Canada, Mexico, or China would likely result in as much—if not more—self-inflicted pain as it would hurt American commercial interests.

Small and poor countries are in a bind. President Trump has clearly bent, if not broken, the WTO rules designed to protect the weak against abuse by the strong. Economically, the weak are suffering the consequences.

References

Besedes, Tibor and Thomas J. Prusa. 2017. “The Hazardous Effects of Antidumping," Economic Inquiry 55(1): 9-30.

Bown, Chad P. and Rachel McCulloch. 2003. "Nondiscrimination and the WTO Agreement on Safeguards," World Trade Review 2(3): 327-348.

Bown, Chad P. and Rachel McCulloch. 2004. "The WTO Agreement on Safeguards: An Empirical Analysis of Discriminatory Impact," in Michael G. Plummer (ed.), Empirical Methods in International Trade: Essays in Honor of Mordechai Kreinin, Edward Elgar: Cheltenham, UK, 145-168 (chapter 9).

Bown, Chad P. 2013a. "How Different Are Safeguards from Antidumping? Evidence from U.S. Trade Policies Toward Steel," Review of Industrial Organization 42(4): 449-481.

Bown, Chad P. 2013b. "Emerging Economies and the Emergence of South-South Protectionism,” Journal of World Trade 47(1): 1-44.

Country groups subject to March 23, 2018 US steel tariffs 

Notes

[1]. Steel is defined as products subject to Trump’s Section 232 tariffs. The customs value for these products was $29.3 billion, and the landed duty-paid value for these products was $30.9 billion in 2017. All intertemporal comparisons are of April through September 2018—i.e., the first six full months after imposition of tariffs on March 23, 2018—relative to October 2017 through March 2018.

[2]. Growth of non-steel US imports (in value terms) over this same period was 6.3 percent. Furthermore, the tariffs went into effect only on June 1 (and not March 23) for 45 percent of US steel imports.

[3]. US consumer- (importer-) paid prices and values are taken from the “landed duty-paid value” import series, which includes the customs value of imports, calculated duties, and cost, insurance, and freight. Foreign producer- (exporter-) received prices and values are taken from the US “customs value” series for imports. The latter is a proxy for foreign exports, since data at the same product level definition needed for the Section 232 tariffs applied to foreign exports to the United States is not available.

[4]. Figure 1 also documents that the higher importer-paid prices drove the value of imports up by 17.2 percent, whereas the smaller increased in exporter-received prices implies the value of foreign exports of steel grew up by only 4.7 percent.

[5]. This group of “small and poor countries” are the set that might satisfy the Agreement on Safeguards Article 9.1 criterion—described below—for the steel products subject the US steel tariffs. They are defined as those at or below the World Bank’s “upper middle income economy” 2018 classification by Gross National Income per capita and also with small shares of the US steel import market. The appendix table lists the trading partners in each group illustrated in figure 2.

[6]. Trump’s tariffs on Canada, Mexico, and the European Union went into effect on June 1, 2018. The quotas went into effect on May 1 (South Korea) and June 1 (Argentina and Brazil). Only Australia did not face any sort of trade restriction on its steel exports and remains exempted.

[7]. For Argentina, Brazil, and South Korea, exporter-received prices may continue to be higher, depending on how the licenses are allocated for the quota.

[8]. Besedes and Prusa (2017) and Bown (2013b) provide evidence of longer-term negative impacts of antidumping tariffs on trade flows, even after the duties have been removed.

[9]. The appendix table identifies the countries that exited by not exporting between April and September 2018. These data are only indicative, given that they are at the country level and are thus not sufficiently detailed to examine firm-level exit decisions. Two countries in each of the two main comparison groups entered the US steel market in the second period (after the tariff was imposed) not having exported in the prior period.

[10]. A number of major economies have also made the broad argument that the Trump administration was not justified by imposing its steel tariffs under the multilateral agreement’s “national security” exception. As of November 10, 2018, nine different WTO members had filed formal requests for consultations for dispute settlement over the tariffs. A number of trading partners, including the European Union, have interpreted Trump’s tariffs as what European Trade Commission Cecilia Malmstrom has called a “safeguard measure in disguise.”  Their argument is that Trump should have imposed the tariffs under Section 201 of the Trade Act of 1974. And if he had, they are entitled to immediate compensation for products in which there was no absolute increase in imports, under the WTO Agreement on Safeguard’s Article 8(3). This legal argument has been used to justify some WTO members’ application of counter-tariffs in response to Trump’s steel (and aluminum) tariffs.

[11]. For solar panels, see paragraph 10 and Annex I of Federal Register “To Facilitate Positive Adjustment to Competition From Imports of Certain Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled Into Other Products) and for Other Purposes” 83 FR 3541, January 25, 2018. For washing machines, see paragraph 9 and Annex of Federal Register “To Facilitate Positive Adjustment to Competition From Imports of Large Residential Washers” 83 FR 3553, January 25, 2018.

[12]. For an empirical analysis of the trading partners hit—and exempted from—the 2002 safeguard, see Bown (2013a).

[13]. See Bown and McCulloch (2003, table 1). See also Bown and McCulloch (2004) for an empirical assessment of Article 9.1 and other ways in which countries could apply safeguard measures differentially across trading partners and thus depart from the most-favored-nation rule of nondiscrimination found in WTO Agreement on Safeguards Article 2.2, which states that “[s]afeguards measures shall be applied to a product being imported irrespective of its source.”

[14]. Trump then continued, “That includes Congress—‘Oh, please don’t charge tariffs.’  Without tariffs, you wouldn’t be—we wouldn’t be standing here.  I can tell you, Bob [Lighthizer] and all of these folks would not be standing here right now. And we’re totally prepared to do that if they don’t negotiate.  But Japan is wanting to negotiate.  Actually, they called about three weeks ago...  And they said, ‘We’d like to start negotiations immediately.’ India, which is the tariff king—they called us, and they say, ‘We want to start negotiations immediately.’”

Data Disclosure: 

The data underlying this analysis are available here.