slides4_Trumponomics.pdf

# The steel and aluminium tariffs case The steel and aluminium tariffs case details the US administration's imposition of tariffs on steel and aluminium imports, citing national security as justification, and the subsequent international reactions and market impacts. ## 1. The steel and aluminium tariffs case ### 1.1 Imposition of tariffs In March 2018, US president Donald Trump announced impending tariffs on steel and aluminium. These tariffs were justified by the US administration under Section 232 of the Trade Expansion Act of 1962. This section permits the president to impose tariffs when an imported article is being brought into the United States in quantities or under circumstances that "threaten or impair the national security". This was the first instance of such a justification being used since the creation of the World Trade Organization (WTO) in 1995, and the law itself had seen limited prior application in the US [3](#page=3) [5](#page=5). ### 1.2 Rationale for using Section 232 The decision to utilize Section 232, rather than more conventional trade remedies like countervailing duties (CVDs) to address issues such as Chinese subsidies, is not definitively known but several factors are suggested [6](#page=6). 1. **Dissatisfaction with the WTO:** The Trump administration reportedly held a negative view of the WTO, particularly after experiencing losses in cases involving anti-dumping (ADD) or CVD measures. This may have prompted the use of a more assertive measure [6](#page=6). 2. **Commodity nature of steel:** Steel is a commodity, meaning if tariffs were applied only to Chinese steel, other countries (like those in Europe) could purchase this cheaper steel and then re-export it to the US at a low price. To circumvent this, the administration opted to tax all steel imports [6](#page=6). 3. **Avoiding WTO scrutiny:** By citing national security, the administration likely hoped to place the measure outside the WTO's purview, as rulings on national security grounds are complex and generally avoided by the WTO [6](#page=6). ### 1.3 Exemptions and initial agreements Initially, not all countries were subjected to the tariffs. The European Union (EU), Canada, Mexico, Australia, Argentina, and South Korea were exempted until late May 2018, providing a two-month window to negotiate deals with the US. Agreements were subsequently reached with Australia, Mexico, Argentina, Brazil, and South Korea. For all other nations, a tariff of 25% was applied to steel imports and 10% to aluminium imports, sometimes in conjunction with quotas or Voluntary Export Restrictions (VERs) [7](#page=7). ### 1.4 Stated reasons for tariffs The US administration provided several reasons for imposing tariffs on steel and aluminium [8](#page=8): 1. **Chinese oversupply:** China had been flooding the global market with steel and aluminium for approximately 15 years, driving down prices and posing a threat to US domestic steel and aluminium factories [8](#page=8). 2. **Worker advocacy:** Steel workers in North America had been urging their government to take action against China's overcapacity [8](#page=8). 3. **National defense self-sufficiency:** The Department of Defense had advocated for increased self-sufficiency in steel and aluminium production [8](#page=8). 4. **Industry connections:** Several individuals within the Trump administration had prior experience working in the steel sector [8](#page=8). 5. **Lobbying efforts:** Glencore, a multinational company based in Switzerland, actively lobbied for these tariffs [8](#page=8). ### 1.5 The role of China in steel and aluminium markets China's rapid urbanization over past decades led to a surge in demand for steel and aluminium. Simultaneously, China significantly expanded its steel and aluminium production capacity, with an approximate 1100% increase over a few years. This expansion was partly fueled by government subsidies for electricity, a significant cost for steel factories. While rising demand initially absorbed the increased supply, a subsequent decline in Chinese domestic demand, coupled with sustained supply, resulted in Chinese producers exporting surplus steel and aluminium to global markets. This influx led to a sharp decrease in world prices. Consequently, China emerged as a major global producer and exporter of both steel and aluminium [10](#page=10) [11](#page=11) [9](#page=9). ### 1.6 Impact on US employment The steel and aluminium industries in the United States employ a substantial number of workers across all stages of production, from primary extraction to secondary (recycling) processes. The total number of workers in the steel industry is approximately 140,000, with an additional 160,000 in the aluminium industries, totaling around 300,000 workers. This figure represents roughly 0.2% of the total US labor force of 160,000,000 workers [12](#page=12). ### 1.7 National security implications and international reactions The assertion that US imports of steel and aluminium posed a threat to national security was contentious. A significant portion of US steel imports originated from NAFTA countries (50%), followed by the EU (14%), and smaller percentages from China (3.2%) and Russia (3.6%). Allied countries expressed considerable displeasure at being categorized as national security threats [13](#page=13) [14](#page=14). The United Steelworkers union, which represents steel workers in both the US and Canada due to the integrated nature of the sector across the border, was also upset. While the union had advocated for strong measures against China's overcapacity, they were surprised and dismayed that the tariffs were applied broadly to all countries, not just China [14](#page=14). --- # Welfare impact of tariffs Tariffs lead to significant welfare changes by affecting consumers, producers, government revenue, and employment, often triggering retaliatory measures. ### 2.1 Impact on consumers and elections Claims that foreign exporters would absorb the cost of tariffs by lowering their export prices have been contradicted by data, which indicates that importers and domestic consumers have borne the brunt of tariff costs across various imported products [16](#page=16). ### 2.2 Welfare analysis of tariffs The economic impact of tariffs involves a detailed breakdown of welfare changes experienced by different economic agents. A study by Fajgelbaum, Goldberg, Kennedy, and Khandelwal estimated these changes for the United States [18](#page=18). #### 2.2.1 Estimated welfare changes in the US * **Consumer and firm losses:** US consumers and firms experienced an annual loss of 51 billion dollars due to higher import prices, representing approximately a 0.27% decrease in GDP [18](#page=18). * **Producer gains:** US producers benefited from an annual gain of 9.5 billion dollars, equivalent to about 0.05% of GDP [18](#page=18). * **Government revenue:** The government collected 34.3 billion dollars in tariff revenues, which is about 0.18% of GDP [18](#page=18). * **Aggregate welfare loss:** When producer gains and tariff revenue are considered, the net annual aggregate loss to the US economy was 7.2 billion dollars, or approximately 0.04% of GDP [18](#page=18). * **Redistribution:** Although the net welfare loss was relatively small, there was a substantial redistribution of wealth from consumers to domestic producers [18](#page=18). > **Tip:** Understanding that the aggregate welfare effect can mask significant distributional shifts is crucial for analyzing the true impact of trade policies. ### 2.3 Impact on jobs The number of jobs affected by tariffs is a critical consideration, especially when moving beyond specific industries like steel and aluminum. Calculations based on US Department of Commerce figures suggest that tariffs can threaten employment [19](#page=19). ### 2.4 Retaliatory tariffs The imposition of tariffs by one country frequently leads to retaliatory measures from its trading partners, escalating trade disputes and widening the scope of economic disruption [20](#page=20). #### 2.4.1 Motivations for retaliation Allied countries, feeling threatened by US national security justifications for tariffs, often responded with their own tariffs, some targeting typical goods like steel and aluminum, while others appeared politically motivated [20](#page=20). #### 2.4.2 Examples of retaliatory tariffs * **Canada:** Imposed tariffs on goods such as inflatable boats, yogurt, whiskies, candles, sleeping bags, steel, and aluminum. These tariffs were lifted after a negotiated deal [20](#page=20). * **Mexico:** Taxed imports of pork, whisky, apples, and steel. Like Canada, these tariffs were removed following a trade agreement [20](#page=20). * **India:** Imposed tariffs on apples, almonds, walnuts, lentils, and chemical products [20](#page=20). * **European Union (EU):** Taxed goods including oranges, cranberry juice, clothing, washing machines, Harley-Davidson motorcycles, and cosmetics [20](#page=20). #### 2.4.3 Scale of job impact due to retaliation The retaliatory tariffs significantly increase the number of jobs at stake, far beyond the initial impact limited to tariffs on steel and aluminum [21](#page=21). --- # Liberation Day and reciprocal tariffs This section details a significant policy shift involving broad tariffs, the rationale and calculation behind reciprocal tariffs, and the underlying focus on trade deficits as a central economic concern [22](#page=22) [23](#page=23) [24](#page=24). ### 3.1 Liberation day and broad tariffs Liberation Day, announced on April 2, 2025, marked a significant policy change with the US government imposing a wave of tariffs on all countries. This initiative was an escalation of previous trade policies, with the second Trump administration doubling down on tariffs, extending them beyond China to all US imports [22](#page=22) [28](#page=28). ### 3.2 Reciprocal tariffs The US government introduced the concept of a "reciprocal tariff". Initially, the stated intent was to apply a tariff equivalent to half of a calculated "real tariff" that US firms faced, which was claimed to include trade barriers and currency manipulation. However, it was clarified that the actual calculation did not account for these trade barriers or currency manipulation [24](#page=24) [25](#page=25). #### 3.2.1 Calculation of reciprocal tariffs The formula used to compute the reciprocal tariff was given as: $$ \tau_{\text{reciprocal}} = \frac{1}{2} \frac{X-M}{M} $$ where $X-M$ represents the trade balance with a particular country. This calculation had a minimum of a 10% tariff. The document critically notes that this formula makes no economic sense under standard assumptions [25](#page=25). > **Tip:** It's crucial to understand that the stated rationale for the reciprocal tariff calculation (including trade barriers and currency manipulation) differed from the actual formula used, which was based solely on the trade balance [24](#page=24) [25](#page=25). #### 3.2.2 Economic implications of reciprocal tariffs Countries with large trade surpluses with the US, such as Bangladesh, were subjected to these 50% tariffs. The policy implied that these tariffs would somehow incentivize countries to buy more US-made goods. However, the document suggests that tariffs, in general, reduce both imports and exports [27](#page=27) [32](#page=32). ### 3.3 Focus on trade deficits A significant driver behind these tariff policies was a strong focus on the trade deficit [32](#page=32). #### 3.3.1 What a trade deficit means and doesn't mean It is important to clarify what a trade deficit signifies and what it does not [30](#page=30). * **What a trade deficit does not mean:** * It does not mean a country is being "taken advantage of" [30](#page=30). * It does not mean a country is losing money, as imports are exchanged for goods and services [30](#page=30). * **What a trade deficit means:** * The relationship between GDP and trade balance is given by $GDP = C + I + G + (X-M)$ [30](#page=30). * Isolating the trade balance, $X-M = GDP - C - G - I$ [30](#page=30). * Crucially, the trade balance is equal to net savings: $X-M = S-I$ [30](#page=30) [31](#page=31). * A trade deficit ($X-M < 0$) implies that $S-I < 0$, meaning that investment ($I$) is greater than savings ($S$). This indicates that there is more investment than savings in the economy [31](#page=31). > **Tip:** Understanding the macroeconomic identity $X-M = S-I$ is key to grasping the document's critique of focusing solely on trade deficits. A deficit is not inherently bad and can reflect a healthy investment environment [31](#page=31). #### 3.3.2 Perceived causes and remedies for trade deficits The focus on trade deficits was often framed by the belief that they were the primary cause of the loss of manufacturing jobs. However, the document asserts that technology (automation) is the number one cause, with trade being a distant second, and higher income ranking third [32](#page=32). Despite this, tariffs were presented as the remedy for trade deficits and the perceived loss of jobs. The perceived cause was also linked to unfair trade practices by other countries. The logic presented suggests that a trade deficit implies other countries are taking advantage of the US. The document questions this, noting that by this logic, the US was taking advantage of others until the mid-1970s [32](#page=32) [33](#page=33) [34](#page=34). #### 3.3.3 The burden of tariffs Ultimately, the document states that tariffs are paid by consumers. This burden can be partially offset by tariff revenue and tax cuts, but it disproportionately affects lower-income households [35](#page=35) [36](#page=36). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Trumponomics | An economic policy and approach associated with the presidency of Donald Trump, often characterized by protectionist trade measures, deregulation, and tax cuts. | | Tariffs | Taxes imposed on imported goods, intended to protect domestic industries or generate revenue. | | Steel and Aluminium Case | Refers to the specific instance where the US imposed tariffs on imports of steel and aluminium, citing national security concerns. | | Section 232 of the Trade Expansion Act of 1962 | A US law that allows the president to impose tariffs or other actions on imported goods if they are deemed to threaten national security. | | WTO (World Trade Organization) | An international organization that regulates and facilitates international trade between nations, setting rules for global commerce. | | Countervailing Duties (CVD) | Tariffs imposed on imported goods to offset subsidies provided by the government of the exporting country, which are deemed to be unfair to domestic producers. | | Anti-dumping Duties (ADD) | Tariffs imposed on imported goods that are sold at a price below their normal value (often below the cost of production), intended to protect domestic industries from unfair competition. | | Safeguards | Temporary trade restrictions imposed by a country to protect domestic industries from a sudden and significant surge of imports that could cause serious injury. | | National Security | The protection of a nation from threats, which can be used as a justification for trade policy measures under certain international trade rules. | | Voluntary Export Restrictions (VERs) | An agreement between an exporting country and an importing country where the exporting country agrees to limit the quantity of its exports to the importing country. | | Overcapacity | A situation where the production capacity of an industry or a country exceeds the demand for its products, often leading to lower prices and potential trade disputes. | | Subsidies | Financial assistance or support provided by a government to a domestic industry, which can give its products a competitive advantage in international markets. | | Capital Intensive | An industry or production process that requires a large amount of capital investment in machinery, equipment, and technology relative to labor. | | Welfare Impact | The effect of economic policies or events on the overall well-being of individuals or society, often measured by changes in economic surplus, consumer surplus, and producer surplus. | | Consumer Surplus | The economic gain consumers receive when they are willing to pay more for a good or service than they actually have to pay. | | Producer Surplus | The economic gain producers receive when they sell a good or service at a price higher than the minimum price they would have been willing to accept. | | Tariff Revenues | The income generated by a government from imposing tariffs on imported goods. | | Retaliatory Tariffs | Tariffs imposed by a country in response to tariffs imposed by another country, typically as a means of economic leverage or retaliation. | | Trade Balance | The difference between a country's total value of exports and its total value of imports over a specific period. A surplus means exports exceed imports, while a deficit means imports exceed exports. | | GDP (Gross Domestic Product) | The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. | | Savings (S) | The portion of income that is not spent on consumption or taxes. | | Investment (I) | Spending on capital goods, inventories, and structures, including household purchases of new housing. | | Reciprocal Tariff | A tariff imposed by one country on imports from another country that is equal to the tariff imposed by the other country on its imports. | | Trade Deficit | Occurs when a country imports more goods and services than it exports. | | Non-tariff Measures | Trade barriers that are not in the form of a tariff, such as quotas, import licenses, and technical standards. | | Currency Manipulation | The practice of devaluing a country's currency to make its exports cheaper and more competitive in international markets. |