President Donald Trump has insisted that "trade wars are good, and easy to win". Photo / AP
President Donald Trump has insisted that "trade wars are good, and easy to win". Photo / AP
President Donald Trump's plan to slap taxes on steel and aluminum imports was branded Friday as "absolutely unacceptable" by Prime Minister Justin Trudeau of Canada, the United States' biggest foreign source of both metals.
Trump hasn't sparked a trade war — yet. But his provocative action has raised the risk of an all-out conflict that could pit the United States against its friends and the entire global financial system that it helped create after World War II.
When Trump announced Thursday he was imposing a 25 per cent tariff on steel and 10 per cent tariff on aluminum on national security grounds, he set into motion the possibility that trading partners would fight back with tariffs of their own.
The rebukes delivered on Friday suggested that some countries were prepared to retaliate if necessary.
Trudeau stressed in his comments he was prepared to "defend Canadian industry" and that the tariffs would also hurt U.S. consumers and businesses because prices could rise.
Douglas Porter, chief economist at the Bank of Montreal, said: "We're pretty consistently flabbergasted that Canada is at the top of the hit parade of trade villains."
Canada is the largest exporter of steel and aluminum to the United States, supplying US$7.2 billion ($9.9b) of aluminum and US$4.3b of steel to the United States last year.
The 28 countries in the European Union could respond by taxing goods that are core to the American identity such as Bourbon whiskey, blue jeans and Harley Davidson motorcycles, said Jean-Claude Juncker, president of the European Commission.
Canadian Prime Minister Justin Trudeau. Photo / AP
"I don't like using the word trade war, but I can't see how this isn't part of warlike behavior," Juncker told German media.
Roberto Azevedo, the director-general of the World Trade Organisation, warned that a "trade war is in no one's interests."
China — the world's largest steel producer and Trump's primary target — stayed quiet about how it would respond.
Trump's fellow Republicans urged caution. Doug Andres, an aide for House Speaker Paul Ryan, said that Ryan "is hoping the president will consider the unintended consequences of this idea."
But the U.S. president appears to be in battle mode.
He views the tariffs as a way to pressure trading partners into submission and wipe away the long-standing trade deficit.
"Trade wars are good, and easy to win," he said on Twitter.
Commerce Secretary Wilbur Ross downplayed the risk of rising prices from the steel and aluminum tariffs. He held up cans of Campbell's soup and Coca-Cola during a CNBC interview, noting that each would go up by less than a penny under the new taxes.
Even if Trump is itching for a trade war, it's not clear if one will materialize.
"It's too soon to tell for a whole host of reasons," said Scott Lincicome, a trade lawyer and adjunct scholar at the libertarian Cato Institute.
Because there are no formal declarations, Lincicome said the "imaginary threshold" for this kind of showdown would involve countries imposing a broad set of tariffs that choked off trade, rather than taxes on the two basic categories of steel and aluminum being proposed by Trump.
A worker loads steel products onto a vehicle at a steel market in Fuyang in central China's Anhui province. Photo / AP
The battle would extend beyond the exchange of goods to include services and investments among nations.
For the time being, so much depends on a set of unknowns, such that the only sure thing is that the risks of a breakdown in trade have increased.
The White House has promised more details next week when the president signs the tariffs into law.
But questions linger.
Would Trump apply the tariffs to political and economic allies such as Canada, Japan and South Korea? Ross only suggested on CNBC that the tariffs would be broad.
Would any products get excluded? There's big differences among the types of steel and aluminum. A metal such as aluminum is used for the foil to wrap Hershey's Kisses chocolates as well as the frame for a Boeing 787 airliner.
The answers to these questions could determine how other countries respond.
Joseph Brusuelas, chief economist at the consultant RSM, sees three possible stages in any trade war.
A light turned red in front of the Krupp Mannesmann steel factory in Duisburg, Germany. Trump risks sparking a trade war with his closest allies. Photo / AP
There could be a "lite" trade war in which partners challenge the tariffs in WTO courts and retaliate with their own targeted import taxes.
The next step could involve a broader array of tariffs that seek to penalise large U.S. banks and leading technology firms such as Amazon and Facebook.
And, then, "if that spins out of control," there could be a breakdown in trade agreements, the creation of non-tariff barriers and limits to the flow of money among countries.
Yet simply by pinning his tariffs on national security — despite indications that steel and aluminum imports aren't a risk for the U.S. military — Trump may have already started to unravel the rules that hold the global trading system together, said Philip Levy, a trade adviser in the George W. Bush administration and now an adjunct professor at Northwestern University.
"If a country need only mutter the words 'national security' to throw up protectionist barriers, we may soon a proliferation of obstacles to trade — that would be a trade war," Levy said.
