MarketLine Blog

US and China trade talks: Emphasis on steel and tariffs is misguided

The danger of current US policy towards Chinese steel is that damaging tariffs will be imposed. Many observers describe such a policy as the nuclear option because the ability of other countries to impose harmful tariffs on US goods will be just as strong. Troublingly, tariffs would do little to solve the actual problem of dumping on the international market. A policy with many similarities was attempted in 2002 but resulted in a public climb down by the then President Bush after severe job losses were incurred. Tariffs are not likely to produce the result some inside the White House believe will happen.

For the United States to make good progress on the problem of Chinese steel, the President must make concessions in other areas of the economy. Beijing has long been frustrated by the ban on sales of advanced technology to China. Slackening rules here would help the mood in China and make imposing changes on the steel industry much more politically palatable. A retreat in some areas of policy will at least prove the US is serious about avoiding tariffs. This is important because the best means to solve the US trade deficit is through increasing exports rather than closing markets to foreign competition.

An international approach is much more likely to succeed than the current policy alongside threats of tariffs. Much support around the world exists for concerted action against the Chinese steel industry, and the US is less likely to succeed by going it alone. Governments all over the developed world are under heaping pressure to do something about the problem. The US is in the position to unite them and become the de facto leader of a group of nations opposed to Chinese policy. Without that, Beijing will likely always be in a position of strength. Imposing tariffs, therefore, does not stand out as a suitable policy.

Historically, those economies which have been subject to protectionist measures fail to innovate. If the US steel industry was granted a greater degree of protection than it enjoys at present, there is a very real danger that innovation will fail to be the priority it should be. New developments in steel manufacturing are greatly reducing the energy requirements and improving quality. Failing to embrace innovation because the competition has been reduced will ensure the US falls behind; something which is unacceptable in what is a very difficult industry.

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