WHEN President Donald Trump tweeted “We want free, fair and SMART TRADE,” on March 1st, trade-watchers groaned. Later that day, after months of back-and-forth between the protectionists and the globalists in the White House, he appeared to deliver the tariffs he has long been promising. He announced tariffs of 25% on imports of steel and 10% on those of aluminium. He promised protection “for a long time”, adding “you’ll have to grow your industries, that’s all I’m asking.” According to the New York Times, he told the assembled executives from steel and aluminium firms whom he met before the announcement that he did not intend to exclude any country from the tariffs.
Mr Trump’s bid to nurse America’s steel and aluminium industries to health could benefit some workers. There is a global glut of both metals, largely driven by an enormous expansion of China’s production capacity since the early 2000s. That created trade flows to America that over 420 separate anti-dumping and countervailing duties could not fully stem.
The avowed aim of the tariffs, though, is national security. Dennis Harbath, who manages the only smelter in America that produces the high-purity aluminium used in some fighter jets, is gratefully preparing to restart some idled production lines as soon as the tariffs are brought in.
Seen more broadly, the proposals look less “SMART”. Americans employed in steel-consuming sectors far outnumber those employed directly in steel and aluminium industries (see chart). Higher prices of inputs for products such as cars, air-conditioning units, refrigerators and beer cans will be passed on to consumers. If they respond by buying less, jobs will be lost. Studies have found that George W. Bush’s tariffs on steel in 2002 destroyed more American jobs than they saved. If the North American Free-Trade Agreement (NAFTA) continues in something like its current form, manufacturers could even avoid the new tariffs by shifting production to Canada or Mexico, from where they can export their final goods to America tariff-free.
The tariffs may not even make for good domestic politics. Orrin Hatch, the Republican head of the Senate Finance Committee, complained on March 1st that “tariffs on steel and aluminium are a tax hike the American people don’t need and can’t afford”. Mr Trump’s move falls under Section 232 of the Trade Expansion Act of 1962, which allows the president to act without congressional constraints. But he still needs co-operation from Congress elsewhere, for example if he wants to renegotiate NAFTA.
Beyond America’s borders the policy will be disastrous. The countries likely to be hardest hit by broad tariffs include close allies such as Canada, Mexico and South Korea.
Under the rules of the World Trade Organisation countries are not supposed to introduce new tariffs. But there is an exception when national security is at stake. If other countries sue America in the WTO (several are planning to do so) and the body’s judges rule in America’s favour, the precedent would encourage many to erect their own tariffs on the same ground. (Countries, including America, have spent years trying to stop China from doing exactly that.) If the judges rule against America, Mr Trump is unlikely to bow and comply.
An even bigger fear is that countries will not wait for a WTO ruling. It took 20 months for the WTO to rule Mr Bush’s steel tariffs illegal. Instead, they might take matters into their own hands. Chrystia Freeland, Canada’s foreign minister, promised her country would “take responsive measures to defend its trade interests and workers”. Mexico is reportedly planning retaliatory measures, too. The Chinese are unlikely to refrain from action. In 2009, after Barack Obama imposed safeguards on Chinese tyres, China responded with (illegal) restrictions on America’s chicken-feet exports. America’s agricultural sector is bracing itself for retaliation.
There may be ways other countries can hit back quickly while sticking at least nominally to WTO law if they treat the American tariffs as a “safeguard” action. Countries are allowed to impose retaliatory duties against a state that imposes such tariffs when imports have not increased in absolute terms. Certain types of American steel imports, such as “long” products (which include rails and wire rod), have not been rising recently. So the European Commission has a provisional list of products. These cover steel, industrial and agricultural products in roughly equal proportions, though that may change over the coming days. In 2002 the European Union referred to this provision when it considered slapping tariffs on American exports such as orange juice.
Meanwhile, Cecilia Malström, the EU’s trade commissioner, said the Europeans could also impose similar tariffs if America’s measures divert cheap steel and aluminium to EU countries.
America’s steel industry has been lobbying for protection for decades. But the chaos of the on-off-on-again announcement, the lack of process, the sweeping nature of the proposals and the threat to the global rules-based trade system are all new. Jennifer Hillman of Georgetown University, who had been a member of the United States International Trade Commission in 2002, describes the verbal announcement as “obviously very unusual”. Mr Trump’s pronouncement came with only vague details of when a formal declaration would be signed (“next week”). This strange way of conducting policy has one silver lining. It gives the tariffs’ many opponents a final chance to change the president’s mind.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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