Leibowitz: Taking the long view on trade and USMCA

It was 84 years ago – on Dec. 7, 1941 – that the world changed forever. Japan’s surprise attack on Pearl Harbor put the US in the middle of global conflict. Afterward came eighty years of US engagement in maintaining global peace and prosperity.

Our society and our system are still being tested. The issues we face now are different from 1941. But many echo the past. Wars (now undeclared by Congress), conflicts that threaten to lead to more conflicts… such things remind us of those now-distant days. And high protective tariffs echo the years leading up to World War II.

New issues occupy us too: sports betting, birthright citizenship, as well as rising food and health care prices. Sure, energy prices are coming down – but from a historic high point. And the list goes on and on. The national debt, the deteriorating electric grid, escalating violence against politicians, as well as past (and future?) government shutdowns. There is little good news to celebrate.

But we can be grateful for some things. One is the regional agreement between the US, Canada, and Mexico that is currently undergoing review. A decision is expected by July 2026 on whether to extend the agreement, which is set to expire in 2036, for another 16 years (to 2052). Three days of hearings just concluded with comments of five minutes’ duration from more than 50 witnesses.

The results of USMCA have been positive, for the most part. Economic growth has benefited all three countries. The Covid-19 pandemic increased unemployment. But since 2020, jobs – especially manufacturing jobs – have grown in all three countries. And increasing North American integration has spurred greenfield investments, especially in the United States, and made supply chains more secure by “nearshoring.”

In 2023, according to a 2024 study by the Wilson Center, the US led the world in foreign direct investment (FDI) at $311 billion in new investments. Canada was second at $50 billion. And the dispute settlement system under USMCA has worked to channel fights into courtrooms rather than onto the street. While the system has its flaws and frustrations, it’s better to fight in court than on the street.

The hearings last week featured overwhelming support for further North American integration. Many witnesses argued that trade within the USMCA region should be free of tariffs. Notably, steel industry representatives differed.

Domestic steel producers love tariffs and want them even higher. They claim that 50% tariffs on steel and aluminum, which hit internal North American trade as well as trade from outside the region, are not high enough. If 50% tariffs don’t work, then high tariffs within the USMCA region will not lead the way to increasing production within the region.

One troublesome feature: the stricter rules of origin for automobiles under USMCA have led to decreasing internal trade and actually led to more automotive imports from outside North America. I have long been, as my readers may have detected, a fan of open markets and expanding trade. On balance, vigorous trade generates prosperity and eases threats of conflict.

The current tariff blitz by the Trump administration and the retaliatory measures by our trading partners not only reduces our prosperity as well as the world’s but also increases the risk of conflict – a threat that unfortunately has not diminished. Right now, trade restrictions are excessive and crimp our prosperity. I’ll debate anyone on conditions under which trade should be restricted. USMCA is a rare bright spot.

Another bright spot could be the announced reopening of one blast furnace in Granite City, Ill., at a plant that first opened in 1895. US Steel, which has owned the plant since 2003, idled the last of its two furnaces in 2023. The company has indicated the ‘B’ blast furnace should start production next year.

What does this mean? First, the domestic market, in US Steel’s judgment, will grow in the near future, justifying the restart. Second, it seems self-evident that the acquisition of US Steel by Nippon made the restart possible. It is part of a multibillion-dollar investment binge by Nippon in US Steel, which provides the financing for a restart and makes the risk manageable. Third, trade protection has largely insulated Granite City from global competition, again making the restart feasible. Score one for the Trump tariff policy.

But those tariffs cause more job losses in manufacturing than will be gained at Granite City. While future production figures at Granite City are speculative, the US industry as a whole will, for the foreseeable future, be unable to supply the regional demand for steel. And so the US will need imports for industrial production of cars, trucks, the electrical grid, capital machinery as well as for construction of buildings, highways, and bridges. Tariffs will suppress all those industries.

The shortages are not only about steel production in general but also about specific products that either are not made here or don’t have enough volume to meet domestic demand. A few examples: semifinished steel, advanced line pipe, steel for oil and gas drilling, thin-gauge sheet, and hundreds of other products.
There are better ways to achieve self-sufficiency in steel. But the question remains: Why would we want to be self-sufficient in steel? US government policy has been aimed chiefly at maintaining production in the United States, not massively increasing it. And the US would need massive increases to be self-sufficient in steel. Just look at half a million petitions for exclusion from steel tariffs from 2018-2025.

Looking at the landscape of trade policy and its long-run effects, there is a lot to worry about. Tariffs are taxes, and increasing taxes on manufacturing will discourage investment downstream from steel. If we truly want to keep steel going, subsidies for domestic mills (especially blast furnace production) would be better than taxing the steel industry’s customers – especially those that need product that domestic mills can’t or won’t supply.