Why you should care about Trump's trade war

At the time, I wrote such a move “would be one of the biggest deliberate campaigns to destroy wealth in modern history. We must hope President Trump keeps his finger off the trade war trigger. Only time will tell.”

Time, it would seem, has delivered its verdict.

And this week, the first salvo in what may eventually be known as the global trade wars, was fired.

Various US laws give the President unique power to unilaterally erect trade barriers. This time, the President plans to use his powers under Section 232 of the Trade Expansion Act of 1962, which enables him to impose tariffs to protect domestic industries deemed key to “national security”.

There is no shortage of dire warnings about the potential harmful consequences of the President’s move.

Australian Trade Minister Steven Ciobo this week expressed his concern: “Of course I am concerned about a trade war. We know that a trade war would result in a global recession and millions of people becoming unemployed. A trade war is the last thing that anyone should seek.”

The irony is that the greatest casualties in Trump’s trade war are likely to be his own citizens.

The immediate effect of the tariff will, of course, be to force any company importing steel and aluminium products into the US to have to pay a new tax of 20 per cent at the border.

Car, boat and plane manufacturers, medical device companies, canned goods and drinks producers and the building sector more broadly will have little choice but to pay the higher price and seek to pass on the higher cost to consumers.

American steel makers will be able to charge more for their products, enjoying higher margins and employing more workers.

But every other industry reliant on imports will be disadvantaged. And those industries combined employ far more Americans than the steel and aluminium sectors.

Higher consumer prices will come at precisely the time that the US Federal Reserve is concerned about an uptick in inflation and pondering the need for more aggressive interest rate rises.

Although the great big new tax will undo some of the stimulus from Trump’s company tax cuts.

History will no doubt judge last week as one of the biggest economic “own goals” in history.

But the risks are not confined to US shores.

How countries, particularly China, Canada and the European Union, decide to retaliate against Trump’s trade salvo will determine how destructive this trade war becomes.

Europe is already talking about retaliatory tariffs on a range of US goods, including whiskey and orange juice, meaning higher prices for European consumers too.

Beijing is considering a retaliatory strike against US agricultural products.

Australia has been lobbying hard – including on Prime Minister Malcolm Turnbull’s recent trip to the White House – to have Australia exempt from the tariff.

As a small and open economy highly reliant on trade, Australia has much to lose in any coming global trade war.

BlueScope Steel would be one of the beneficiaries if Trump went ahead with his tariffs.
Photo: Torsten Blackwood

In the immediate term, BlueScope Steel is Australia’s largest exporter of steel products. But it has major operations in the US, which actually stand to gain from the protectionist measure.

But longer term, the global slowdown in trade and production that a trade war would unleash would hurt jobs across all sectors of the Australian economy.

While Australian politicians on both sides of the divide remain staunch opponents to new tariffs, political pressure would mount if Australia were to be flooded by cheap steel products no longer being sent to the US.

Australian consumers, of course, would end up bearing the cost of any such tariffs.

It’s early days yet.

Trump has not signed his order. And the full lobbying power of domestic manufacturers who stand to lose under it is already being brought to bear in the Capitol.

Whatever the eventual details, it is clear that Trump’s threat of a trade war can no longer be dismissed as bluff and bluster.

The world will be a poorer place if countries decide to retreat behind tariff walls.

And Australia’s Employment Minister will want to keep her mind on the real job at hand.