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US Steel Tariffs Have Hit Smaller and Poorer Countries the Hardest

President Donald Trump’s steel tariffs hit almost all US trading partners large and small with the same penalty: a 25 percent duty on imported steel. The main victims included China, Canada, Mexico, and the European Union—all of which then retaliated as part of Trump’s trade war. But a little-noticed and little-appreciated aspect of these particular tariffs is that they also hurt smaller and poorer steel-producing countries—and inflicted pain on them disproportionately.

 

 

The disparity of impact highlights two disturbing developments. First, Trump’s rationale for acting against major trading partners like China has been to protect US national security. But importing steel from smaller producers in Bangladesh, Guatemala, or Peru could not possibly be considered a national security threat. Thus, Trump is hitting these more vulnerable countries with no stated policy goal.

 

 

Second, Trump’s actions once again violate norms that the United States helped establish at the World Trade Organization. WTO members had explicitly committed themselves to shield vulnerable, innocent bystanders from the fallout of protectionist actions. Trump’s tariffs on the poor are yet another such commitment discarded by his version of America First this one receiving little fanfare because of the identity of the affected countries.

 

 

A significant irony of Trump’s trade war is that, because of strong US economic growth, total US imports of steel actually increased by 2.2 percent in the first full six-month period after Trump imposed 25 percent tariffs on March 23. But this uptick in steel imports masks some very divergent impacts found beneath the surface.

 

To begin, the effect of the tariffs depends on whether they are measured from the perspective of a US consumer or a foreign producer. Contrary to Trump’s argument that his tariffs are only hurting exporting countries, the tariffs have also hit US consumers. The tariffs drive a considerable wedge between the prices that US consumers (importers) pay and that which foreign producers (exporters) receive.

US consumers have seen price increases on imported steel of 14.7 percent relative to the period before the tariffs. Yet according to data assembled here, the foreign exporters of steel have received only a 2.4 percent price increase over that same period.

Trump’s tariffs have hit poorer countries much harder than the rich but for reasons that are not yet clear. One contributing explanation is that their smaller scale means thinner profit margins. They may have less ability to absorb potential price reductions associated with Trump’s tariffs, perhaps because US consumers are less willing to accept price increases that they might seek to pass along.

 

 

Whatever the cause, the data show a significantly disparate impact. Consider a group of 29 countries that collectively made up 4.1 percent of US steel imports in 2017 but in which no individual country had a share of the US steel import market larger than 1.25 percent. These countries are also relatively poor; on average, their income per capita in 2017 was $4,568. For comparison, US income per capita in 2017 was $58,270.

 

 

Consider the top panel of figure 2 which illustrates percent changes in trade flows in the six months after Trump’s tariffs went into effect on March 23 relative to the previous six months. These small and poor countries sent fewer exports by volume to the United States, at reduced prices, and thereby earned less revenue. Export volumes dropped by a precipitous 12.1 percent; this decline runs counter to the general trend of the overall increase of 2.2 percent found in figure 1. Furthermore, the prices the exporters in those poorer countries received for their sales to the United States decreased by 3.9 percent. Falling prices and declining export volumes combined to reduce the revenue earned by 15.5 percent, or $100 million, from their steel exports relative to the previous six-month period.

Compare the experience of small, developing countries with a collection of larger or richer countries that Trump also hit with tariffs starting March 23. This second group includes countries like China, India, and Russia; collectively they made up 28.9 percent of US steel imports in 2017. The countries were also richer, with an average income per capita in 2017 of $26,581.

 

Figure 2 illustrates the difference. Despite also being hit with Trump’s tariffs of the same size and at the same time these other countries’ steel exports to the United States increased by 11 percent. The prices they received for those exports also fell, just as for the smaller countries, but only by 2.4 percent. And the export revenue of the larger or richer countries actually increased by 8.3 percent, or $305 million. There is thus a 23.8 (23.1) percentage point differential trade performance in revenues (volumes) between the small developing countries and this main comparator group of exporters.

 

 

Small And Poor Countries Have Borne The Brunt Of Trump’s Tariffs

A final group in figure involves the countries not immediately hit by Trump’s tariffs on March 23: Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea. This group made up 67 percent of US imports in 2017 but is not useful for comparing trade impacts since they were all exempted from Trump’s tariffs for at least a part of the six-month period.

 

Figure 2 indicates that while the export volumes of these economies were flat, their exporter-received prices were 4.7 percent higher than during the prior period. Again, the average price gains for these exporters likely arose because, between March 23 and May 31, Trump had imposed import restrictions on all other countries, which put upward pressure on consumer (import) prices for everyone (see also figure 2). And yet because exports from these seven economies were not subject to tariffs, they were able to keep the benefits of the consumer price hike for themselves.[7] The impact of this was a 4.7 percent increase in their export revenues, or $478 million.

 

 

Smaller Countries May Also Suffer Disproportionately If Trump’s Tariffs Lead Them To Exit

The reduction of trade from smaller developing countries could have taken one of two forms: a reduction in export volumes or a complete exit from the US market. Given the fixed reentry costs to reestablish contacts, trust with buyers, and a distribution network, exit due to Trump’s tariffs is likely to have an even more negative longer-term effect than a simple reduction in export volumes.

 

 

In the six-month period following the tariffs, 5 out of the 27 small developing countries that had exported steel products in the prior six months did not export to the United States.[9] While not too different from the 5 out of 24 countries exiting in the comparison group, exporter exit in smaller countries remains a concern worth monitoring.

 

 

The timing of Trump’s tariff exemptions meant Argentina, Brazil, Canada, Mexico, and the European Union enjoyed preferential access to the US steel market during April and May. While that preferential access was eventually eliminated, it may have contributed to a more permanent and negative impact for those who first bore the brunt of tariffs—the exporters in smaller and poorer countries.

 

 

WTO Rules Were Designed To Help Shield Small And Poor Country Exports From Disparities Caused By Tariffs or small, developing countries, it was not supposed to be this way. In their view, if Trump had followed the standard rules for implementing trade protection as a “safeguard”—instead of as a tariff that he has stated is necessary to protect America’s national security—then their exports would likely have been shielded.

 

 

If Trump had imposed a tariff instead under Section 201 of the Trade Act of 1974, he would have been expected to follow the rules of the WTO’s Agreement on Safeguards Article 9.1, which states:
Safeguard measures shall not be applied against a product originating in a developing country Member as long as its share of imports of the product concerned in the importing Member does not exceed 3 per cent, provided that developing country Members with less than 3 per cent import share collectively account for not more than 9 per cent of total imports of the product concerned.

 

 

Had Trump followed these provisions, the smaller, developing countries illustrated in figure 2 would not have been hit with the tariffs and likely would not have suffered the same adverse impact on their trade.

 


 

PIIE

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