President Trump made proclamations on Thursday to impose new import tariffs of 25 percent on steel and 10 percent on aluminum. Effective March 23, these tariffs would apply to steel and aluminum exports arriving from all countries—aside from Canada and Mexico. Those two get a temporary reprieve, pending Trump's assessment of the outcome of the NAFTA renegotiation.
In a new twist, Trump also decided other partners can ask to negotiate with US Trade Representative Robert E. Lighthizer to be excluded from the tariffs.
Conflict may loom ahead. After Trump's initial tariff announcement last week, the European Union quickly threatened to hit back. EU Trade Commissioner Cecilia Malmstrom even laid out an explicit, three-pronged response to Trump's tariffs, should US steel and aluminum levies strike the European Union.
Here's the EU plan, explained:
1) The EU is the second-largest foreign supplier of steel and aluminum to the United States, behind Canada
In 2017, the European Union exported $6.2 billion of steel and $1.1 billion of aluminum to the United States. But with Canada and Mexico off the hook, the European Union will see a bigger share of the damage under Trump's tariffs than initial estimates of more than $2.6 billion per year in lost trade.
Brussels is troubled about being caught up in tariffs imposed under Section 232 of the US Trade Expansion Act of 1962, which allege the specific imports threaten US national security. But most EU countries also are part of the North Atlantic Treaty Organization (NATO)—they are US military allies. At the Thursday announcement, Trump hinted he might more favorably exclude those NATO countries from the tariffs that are "paying the bills."
Second, global overcapacity of aluminum and steel is at the root of the Trump tariffs—and much of this production comes from emerging economies like China. But because the United States has already imposed so many special tariffs on China, only 6 percent of US imports of steel and aluminum come from China. In Europe's view, its companies also struggle from this excess global production. These companies now face a direct hit from Trump's tariffs, while Chinese companies will see less impact.
2) The EU will take on Trump in the WTO dispute process
Malmstrom's first step would be to challenge Trump's "national security" tariffs through a formal World Trade Organization (WTO) dispute. If the European Union wins and Trump refuses to remove the tariffs, the European Union could be authorized to retaliate against US exports.
However, even the idea of this dispute is a major headache for the WTO system.
Article XXI in the WTO and its predecessor—the General Agreement on Tariffs and Trade—seemingly permits countries to "self-judge" when and if to impose import restrictions to protect their national security. There have been few cases to predict how such an EU confrontation might play out legally.
Yet Trump's own statements may give the European Union grounds to challenge the new US tariffs. At Thursday's announcement, Trump referred to steel and aluminum imports arriving under "a process called dumping," complaining that US companies must compete with "cheap metal that is subsidized by foreign countries." Allegations of subsidies and dumping fall under entirely different WTO trade laws—and this would undermine Trump's own national security defense.
A WTO dispute could be a lose-lose for both sides, though. If the Trump administration wins, it opens a gaping hole in the WTO rule book for any country to impose trade restrictions under the national security justification. If Trump loses, he might react negatively and pull the United States out of the global trade agreement altogether.
3) Would the EU retaliate immediately?
Brussels' second tack is to denounce Trump's tariffs as a "safeguard measure in disguise." Under WTO rules for safeguards, Article 8(3), the European Union would then lay claim to more immediate compensation than it would be able to achieve by going through a lengthy WTO dispute.
In short, this means that if the US imports of the steel or aluminum products weren't actually increasing in absolute terms during the period that is the subject of Trump's tariff investigation—then the European Union doesn't have to wait. The European Union reportedly would seek compensation of 2.8 billion euros, or $3.4 billion.
Their argument may be that for some steel products—i.e., $3.4 billion of the $6.2 billion of 2017 EU exports—EU exports to the United States didn't increase above 2016 levels. Without an increase, Trump's 25 percent tariff to reduce those exports means Brussels is due compensation—a "rebalancing," as Malmstrom put it. This would come from a new EU 25 percent tariff on the same, $3.4 billion amount of US exports of products like cranberries, Harley Davidson motorcycles, blue jeans, and bourbon.
Some legal scholars are skeptical that this EU approach would pass WTO muster if challenged. Yet, this is how compensation under the WTO typically works—retaliation is not punitive and there are no fines. Countries simply institute a reciprocal rebalancing of market access through changes to tariffs.
4) The EU may impose its own "safeguard" tariffs to address a new import surge
Malmstrom indicated that the third part of the EU response would be to initiate safeguard investigations of steel and aluminum that could quickly result in European trade restrictions that copy Trump's. Her concern is that trade "deflected" out of the US market—because Trump's tariffs closed it down—surges into the European Union, imposing adjustment costs on European steel and aluminum industries.
This is a repeat of what happened in 2002. Immediately after President George W. Bush imposed a safeguard tariff on imports of steel, the European Union, China, and other countries replicated with tariffs to prevent their own import surges. Meredith Crowley and I have documented instances in which trade policy has deflected trade, thus motivating such a policy response.
5) The EU had hoped to work with the US on global steel and aluminum issues
Interestingly, Malmstrom, Lighthizer, and Japanese trade minister Hiroshige Seko are scheduled to meet this Saturday in Brussels. At the December 2017 WTO ministerial meeting in Buenos Aires, the three issued a joint statement that they "shared the view that severe excess capacity in key sectors … are serious concerns for the proper functioning of international trade" and that "to address this critical concern, [they] agreed to enhance trilateral cooperation." This was clearly a nod to addressing the common concern of China's steel production.
Except now the European Union—along with Japan—is being asked to cooperate with Trump's threat of tariffs hanging over their heads.
Chad P. Bown is a senior fellow at the Peterson Institute for International Economics in Washington. With Soumaya Keynes of the Economist, he hosts Trade Talks, a weekly podcast on the economics of international trade policy. Follow him on Twitter @ChadBown.