President Trump on Thursday ordered tariffs on imported steel and aluminum from every country in the world except Canada and Mexico. Many politicians and economists fear the tariffs — 25 percent on imported steel and 10 percent on imported aluminum — will spark a potential trade war.
The White House insists there will not be a trade war, but it's happened before. In 1930, the U.S. entered a major trade war after Congress passed the Smoot-Hawley Tariff Act.
Here & Now's Peter O'Dowd spoke with Chad Bown (@ChadBown), senior fellow at the Peterson Institute for International Economics and co-host of the podcast "Trade Talks," on Monday, who says Trump's tariffs will likely have less of an impact than those implemented in 1930.
"These are worrisome, and they're going to be economically costly for the American economy, but so far they're relatively small in scope," Bown says. "He's not raising tariffs over the entire U.S. economy say, this is only about 2 percent of U.S. imports. And we also have procedures in place for other countries to respond to those kinds of trade policy actions today that we didn't have in the 1930s."
On the Smoot-Hawley Tariff Act of 1930
"The Smoot-Hawley tariff was a broad-based set of import restrictions that the United States imposed in the 1930s. Now it's often confounded with the Great Depression, but there's a couple of things that are worth clarifying. These tariffs didn't cause the Great Depression. They were actually set up in legislation that was established a couple of years before the Great Depression actually started. So the chain of events were, you had the stock market crash in 1929, it led to the Great Depression. In 1930, the United States imposes import restrictions, these things called the Smoot-Hawley tariffs, and then over the next couple of years, you had countries all around the world imposed lots and lots of different sorts of import restrictions. But it also turns out that the Smoot-Hawley tariffs themselves weren't really the trigger for those other countries imposing their own trade restrictions, and so it also wasn't kind of a trigger for a trade war that ultimately erupted."
On the philosophy behind the Smoot-Hawley tariffs
"What they were trying to do at the time was to assist farmers in the United States that were suffering from low prices. The problem [was] that these farmers were also large exporters of their agricultural products, and so tariffs weren't actually going to end up helping them all that much. So it ended up being a pretty poorly designed policy even from the start."
"We really wouldn't expect to see major impulsive calls for import protection when the economy is doing relatively well as we're seeing right now."Chad Bown, on Trump's tariff plan
On the response to trade policy mistakes of the 1930s
"So part of what happened in response to the 1930s is after the Second World War the United States, Great Britain and a number of other countries built a brand-new trading system to try to avoid the kind of mistakes and downward spiral of trade policy actions that we had seen arise in the 1930s. And so in 1947, they established this thing called the General Agreement on Tariffs and Trade. It was a basic multilateral rules-based system for trade. It's essentially the same one that we live under today. Today, it's called the World Trade Organization, but it's basically the same set of rules. And what these rules do is they provide a much fairer, much more non-discriminatory and a transparent approach to trade policymaking."
On if the state of the economy has an impact on tariffs
"It does, but I would argue kind of in the opposite direction. And that is, you know, we really wouldn't expect to see major impulsive calls for import protection when the economy is doing relatively well as we're seeing right now. We do expect to see companies that have to compete with imports and their suffering during a recession say to be much more likely to ask for protection, and so that's what is a little bit worrisome. If the economy were to somehow go into a downturn, we might end up seeing a lot more demand for the kinds of trade barriers that President Trump seems really interested in posing. So the ones that he's imposing at the moment in many instances, you know, aren't needed necessarily. They aren't being necessarily requested wholeheartedly by American industries and companies, especially when it comes to things like what he's proposing on automobiles. You know, there's really no call by the American automobile industry to ask for new tariffs, and so that is a little bit worrisome."
"They're making the argument that they need to impose tariffs to protect American national security. That is not really a legitimate argument."Chad Bown, on Trump's approach to tariffs
On the Trump administration’s approach for these tariffs
"There's a very small grain of truth to the Trump administration's approach, and that is there is at the moment global overcapacity in the steel and aluminum industries, and that needs to be addressed, and some of that is coming out of excessive production expansion in China. But what's really problematic is the Trump administration's approach to dealing with that issue. They're potentially imposing tariffs under a trade law called Section 232 of the Trade Expansion Act of 1962. It's a national security law. They're making the argument that they need to impose tariffs to protect American national security. That is not really a legitimate argument.
"When you look at the data, most of the steel that the United States imports does not come from China, it actually comes from our allies. The biggest sources are countries like Canada, the European Union, Mexico, Japan, South Korea. These are countries with which we have strategic military alliances and common defenses in many cases. So to say that stopping imports from those countries would somehow improve the American national security, I just think it's an extremely bogus argument. It's not to say that there doesn't need to be something done about the underlying problem. It's just the approach that the Trump administration has taken to deal with that problem is really, really problematic."
On Trump's claim that trade wars are easy to win
"There's no one who wins in a trade war, in the country sense at least. What is going to happen is trading partners are going to retaliate against the United States. We're already seeing reports that the European Union is establishing the products that American companies and farmers currently send to Europe that it's preparing to retaliate over if the Trump administration goes ahead with this. A lot of these are products that have nothing to do with steel or aluminum. You know, it may be bourbon from Kentucky, Harley-Davidson [motorcycles] or dairy products or blue jeans. And so if you're a worker in one of these companies, you're saying yourself, ‘Wait a second, I'm not benefiting at all from these steel or aluminum tariffs, and not only am I not benefiting, but I'm going to be caught in the crossfire of President Trump's trade war.’ So no, there really are no winners in heading down this kind of path."
This article was originally published on March 05, 2018.
This segment aired on March 5, 2018.