Leibowitz: The Canadian blowup and its implications

The new reality of arbitrary and unlimited tariffs again reared its head last weekend. Twenty billion dollars of Canadian imports are now taxed at 50%, effective last Saturday. Capping a week of intense negotiations that gave every indication of a deal up until Friday night, the Canadian negotiators departed Washington. They announced that the offers made by the United States were too tepid and the demands of Canada too great to accept. 

This topsy turvy week coincided with the SMU Steel Summit in Atlanta. I was privileged to sit on a trade panel, skillfully moderated by CRU’s Lynn Lupori, that discussed the implications of the blowup with Canada on trade in general and the US-Mexico-Canada Agreement (USMCA) specifically. 

While the panelists differed on the implications of the Canada blowup on USMCA and trade in general, recent events show us that the US government wants other governments to accept sharp restrictions on access to the US market through acquiescence to high tariffs, in exchange for—what exactly? I don’t know. One possibility for Canada was the reduction of steel tariffs from 50% to 25%. But Canada was not willing to buy that reduction with other concessions. 

Much of the SMU panel discussion dealt with the threat of China to the global economy. All of us—Kevin Dempsey of the American Iron and Steel Institute (AISI), Phil Bell of the Steel Manufacturers Association (SMA), and Ezequiel Tavernelli of the Latin American Steel Association (Alacero)—agreed China was a challenge the US and other Western countries needed to address. 

But how? While Chinese steel, tariffed now at 62.5% at a minimum, is largely absent from the US market (but still present in Latin America), imports of downstream products from China or containing Chinese-origin steel are climbing. In short, the tariffs are jacking up US government tax revenue, and the profits of steel producers. However, US industries other than steel and US consumers are seriously hurt by these tariffs, creating supply chain bottlenecks and stoking inflation. 

In the meantime, Chinese steel exports to the world at large have skyrocketed. Most countries have not matched the US in the tariff levels on Chinese steel. It’s easy to understand why: Chinese steel is cheaper than most alternatives. The price difference is NOT because China is more efficient at making steel. It is because the Chinese government subsidizes the exportation of Chinese steel. With the collapse of the building boom in China, the domestic consumption of steel has fallen dramatically. And while domestic demand is down, the steel mills in China remain. They produce ten times more steel than the US does. 

US steel associations (like AISI and SMA) insist that 50% tariffs on their customers must stay in place or even increase as long as China fails to shutter excess capacity. If taken literally, this means the tariffs will stick around for decades, because China’s politicians in Beijing and the provinces are no more willing to eliminate manufacturing jobs than their counterparts in the United States. 

Tariffs thus have no effect on China’s willingness to keep exporting (and subsidizing production) to keep people working in the mills. The US market has ceased to be the world’s largest for steel. The latest estimates of global steel production put the US in third place among steel producers, behind China and India. Nor is steel production as important to the US economy as it once was. As a percentage of global GDP, the US is first with about 25% of the global total. By contrast, according to estimates by the World Steel Association, the US produces about 5% of global steel production. 

The problem of China in steel production and in production of steel-containing products is clearly important. But US tariffs are not attacking the problem. Steel and steel-containing products from China are penetrating world markets. But the US has not engaged other countries in cooperating to reduce their impact. 

The current USMCA provides the best opportunity to create a regional economic powerhouse to counter China. A robust North American market will clearly be more powerful in this effort, rather than the US alone. But the Trump administration is not showing any interest in that, as evidenced by the Canada blowup. 

Tariffs, unfortunately, will not provide the certainty needed for manufacturing investment in North America or the US in particular. This is so because the tariffs we have now are strictly executive actions. The next president could undo these tariffs. Investors know this and are understandably reluctant to make new investments that take decades to achieve returns.  

Even less encouraging is the effort to incentivize China to shut down capacity. That would require that China change its basic assumptions supporting the current export surges. Tariffs from the US will never do that. China supports the export surge because of its perceived geopolitical interests and to preserve jobs. Even if every country on earth imposed 50% tariffs on Chinese steel, the exports would largely continue until China runs out of money to subsidize exports. That could be a long time indeed.  

Because many countries do not place as much importance as we do on shutting down steel production in China, a global tax on Chinese steel (and downstream products) production would require carrots as well as sticks. The US would need to make assisting in this effort worthwhile, at least for major consuming nations. What would that take? Economic assistance from the US and other developed countries would help. But nothing like that has been suggested. Perhaps our $40 trillion national debt is one reason why.  

Rather than recruiting other countries to help, the US appears intent on threatening to punish countries, including its closest friends. In my experience, this strategy has never proved productive. 

Doubling down on threats will not give us what we need. The tariffs punish Americans in exchange for nothing.