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In declining to support international action against the new US steel and aluminium tariffs, Malcolm Turnbull damages our standing on trade. By Mike Seccombe.

Trump’s trade war leaves Turnbull gun-shy

For a brief time at the beginning of this week, Trade Minister Steve Ciobo gave the impression Australia might actually do the courageous thing and take on Donald Trump over trade policy.

In an appearance on ABC TV’s Insiders program, Ciobo left open the possibility that Australia could join other nations in taking action against the United States through the World Trade Organization, over Trump’s imposition of heavy tariffs on imports of steel and aluminium.

Ciobo correctly cited Australia’s strong record as an advocate of free trade, talked up the benefits of “good” trade policy, and boasted that “we practise what we preach” by supporting the WTO. He did not demur when host Barrie Cassidy suggested the new US tariffs were bad policy.

Asked if Australia would support action against the US before the WTO, as threatened by the European Union, Ciobo said:

“We’d look at that. We are open to … actions where appropriate to protect Australia’s national interests. No one can say I’ve been shy in terms of being a strong advocate for the benefits of more open investment and more open trade.”

Malcolm Bosworth saw the interview and dared to hope. Bosworth is a specialist economist who advised the Australian government for 20 years on trade and industry policy, worked with the secretariat of the General Agreement on Tariffs and Trade, and is now a consultant to the WTO as well as a senior research fellow at the Australian National University’s Crawford School. He is both an expert and a true believer in the benefits of free and open trade.

It is his strongly held view that Australia should be in there with “the Europeans, the Koreans, all the others who are affected”, pushing back against the Trump tariffs.

“We should do it,” he says. “We should do it to support the WTO – which is rapidly becoming a lame duck – and to support the principle of non-discrimination in trade.”

We should do it, Bosworth says, because Trump’s approach presents a “real danger for global trade policy”.

We should do it to prevent a further slide into a “murky world where a hegemonic country like the US, a bully on the block, can start dictating policy to other countries … which does not reflect economic or trade issues per se, but will reflect foreign policy, defence cooperation, and other things”.

And we should do it even though Trump has exempted Australia from the new imposts of 25 per cent on steel imports and 10 per cent on aluminium imports, because “while this time Trump is discriminating in our favour, next time around we might be the ones discriminated against”.

When Ciobo suggested that the government, normally so timid in dealing with the US, might show the courage of its free trade convictions, Bosworth felt some guarded optimism.

But it was dashed within a day. On Monday, Prime Minister Malcolm Turnbull flatly contradicted his trade minister, although he pretended to be contradicting the media.

“There was speculation in the media about actions taken with other countries to do with these US steel and aluminium tariffs,” Turnbull told reporters in Port Kembla.

“As a country that is exempt from US tariffs, we cannot bring up that complaint. I just want be clear about that.”

Clear and wrong, according to the trade policy expert. Of course we can do it: we are clearly affected by Trump’s tariffs.

Australia is the world’s biggest exporter of iron ore. On Monday, even as Turnbull was insisting Australia had no dog in the Trump tariffs fight, Business Insider Australia carried a story headlined “Iron ore skids to a 3-month low”. The benchmark price had fallen 13.3 per cent since the start of the month, it reported.

The newly applied steel tariffs were not the only reason for the dramatic fall, in the view of quoted analysts. Chinese iron ore stockpiles are exceptionally high, which also has weighed on prices. But the uncertainty created by Trump’s protectionist announcement, and the possibility of retaliatory actions by other countries, were big factors.

The uncertainty is reflected, too, in the prices of mining stocks, which have seriously softened since Trump’s announcement.

Notwithstanding Turnbull’s boasting about the government’s lobbying success in gaining Australia an exemption from the tariff hikes on steel and aluminium – and the assistance of golfer Greg Norman – the markets and the market analysts see things Bosworth’s way, as inevitably damaging to our resource sector.

And, depending on how things play out, the damage could be more widespread.

First, it’s worth examining the circumstances leading up to Trump’s announcement. They bear little resemblance to a typical trade dispute.

The US imports a lot of steel and aluminium. According to official US trade figures, it imported almost 27 million tonnes of steel in the 12 months to last September, making it by far the world’s largest importer. And its domestic steel producers are unhappy about that, which explains why, as of last June, according to the WTO, America had a total of 149 “trade remedies” in effect against steel imports from dozens of countries, including one involving Australia. These remedies are essentially tariffs badged as anti-dumping or countervailing duties.

But that is nothing new. Last year’s US steel imports were about the average of the past decade or more. The fact is other countries produce certain steel products more efficiently.

The story of aluminium is far more dramatic. American domestic production is in freefall. In 2016 alone, it plunged 47 per cent, to its lowest level in almost 70 years. The reason is not hard to divine: the US lacks the necessary inputs. It has neither reserves of the aluminium ore – bauxite – nor abundant cheap power to refine it.

Given Trump’s rhetoric and much of the media analysis about the reasons behind the tariffs, you might think he was targeting China for dumping the metals into the US market. But you would be wrong: Chinese steel and aluminium represent a relatively small share of the total US imports of the two metals.

In the case of steel, Canada is the largest source country, at 16 per cent, followed by Brazil (13 per cent), South Korea (10 per cent) and Mexico (9 per cent). China does not even make the top 10.

In the case of aluminium, 59 per cent of US imports come from Canada, followed by Russia and United Arab Emirates with 6 per cent each, and China, with just 5.

The consensus among credible analysts is that the motivation behind Trump’s new tariffs relates neither to concerns about dumping nor, as he has claimed, national security. There is no reason to fear that Canada would deny the US access to the aluminium it needs to build its aircraft or the steel it needs for its navy.

This is about base politics, in both senses of the word.

That was obvious as he signed the tariff proclamation last week. As The Australian Financial Review noted, on one side of the White House’s Roosevelt Room stood members of Trump’s “cabinet of billionaires and ex-Wall Street bankers … dressed in tailored business suits” while on the other side of the room “10 steel and aluminium workers from Pittsburgh and Kentucky wore grey overalls and held white hard hats”.

Trump was honouring an election promise – albeit a hollow one – made to those desperate blue-collar workers who believed his populist election policies would bring back their disappearing jobs. He was trying to reinforce his base.

There are questions about whether that will work. As Iowa Republican congressman, David Young, complained: “There’s not a day on the farm when a farmer doesn’t touch steel. The agriculture industry is worried about these tariffs on aluminium and steel.”

So are car-makers and other big users of steel and aluminium.

It could be that what Trump wins on the swings he loses on the roundabouts; that his support for dying steel and aluminium industries damages other healthy industries and costs him votes.

Then again, Trump’s tariffs are not really about metal imports. Or at least not primarily about them. They are part of a broader assault on free trade. 

“His other big electoral promise,” Bosworth notes, “was to renegotiate NAFTA, the North American Free Trade Agreement with Canada and Mexico.”

So he imposed the tariffs and then conditionally exempted Canada and Mexico because he thought they dudded America in that deal as well. Which is “crap”, according to Bosworth.

“He said, ‘I’ll exempt you from these tariffs while we’re negotiating NAFTA, and if you give us a good deal, we’ll keep exempting you.’ He’s holding a gun at their heads.”

Trump’s views about trade agreements may be crap, but they appear to be genuinely held.

And that really scares trade experts. He pulled the US out of the Trans-Pacific Partnership. He has imposed punitive tariffs on things such as washing machines and solar panels. And he appears quite prepared to continue in the same vein. He seems to have no fear about starting a global trade war.

Indeed last Friday, the day after the announcement of the steel and aluminium hikes, the president tweeted: “Trade wars are good, and easy to win.”

We’ll see about that. The more optimistic analysts argue that America has engaged in similar belligerent acts in the past and been forced to back off. In particular, they point to the example of President George W. Bush, who also imposed tariffs on steel in his second year in office.

The European Union responded with imposts of its own, cunningly targeting products from swing states vital to Republican electoral prospects. There was also big pushback from domestic industries that were damaged by higher prices. A large number of countries took a compliant to the WTO, which found against Bush and he folded.

Other observers have a darker view, however. The Bush tariffs, said a Bloomberg analysis, were consistent with “a bipartisan tradition that began after the Great Depression” whereby “presidents would impose tariffs and other trade barriers to appease congressional protectionists while freeing trade generally”.

Bush, like all predecessors, wanted to enact new trade agreements.

But Trump is not playing any such tactical game. He believes previous trade agreements entered into by administrations of both persuasions have been ruinous for America, and repeatedly talks of ripping them up, Bloomberg said.

Another analysis, on the site of the US Council on Foreign Relations, began with this lament:

“March 8, 2018: The day the World Trade Organization died. Twenty-three years and sixty-seven days after its launch on January 1 of 1995. RIP.”

It continued: “For the past quarter century, the United States has been both a leader and a model citizen of the WTO, almost always hewing closely to the rules even when that meant making politically difficult decisions at home to comply with adverse rulings.”

But Trump, it said, had defied all the established rules, imposed tariffs on a flimsy national security pretext, and “launched a free-for-all negotiating process in which its trading partners are now expected to come to the White House hat in hand begging for exemptions, a clear violation of the understanding that trade will be conducted under internationally agreed rules, not ad hoc negotiations”.

Of course, some powerful forces are fighting back. The day after Trump’s announcement, Jean-Claude Juncker, the president of the European Commission, indicated Europe would respond with cleverly targeted sanctions.

The list of potential American products included iconic American brands such as Harley-Davidson, Levi’s and Kentucky whiskeys, which, not coincidentally, are all based in Republican heartland states. There will inevitably be complaints to the WTO.

Maybe they will succeed, once again, in forcing America to back off. But given the irrationality of the Trump White House, it’s no safe bet. The indications are that Trump’s just warming up for a bigger fight, with China.

Of course, Australia wants no part of that fight. We’ve got our exemption. Heaven knows what Australia’s other trading partners make of this.

Maybe, says Tim Harcourt of the University of New South Wales business school, a former chief economist of the Australian Trade and Investment Commission and international economist for the Reserve Bank, if a major trade war breaks out, these partners will see Australia as a reliable and safe contrast to the “erratic and chaotic” US.

Equally, he ventures, they might take a dim view of a government that “in the face of US protectionism, goes in pleading for an exemption. Like, ‘I’m all right Jack, and stuff everyone else.’ ”

For a while, at the beginning of the week, it looked as if Australia might do the courageous thing and stand up to a bully. But we didn’t.

Despite Steve Ciobo’s rhetoric about our determination to practise what we preach, Malcolm Turnbull is leading the cap-in-hand brigade.

This article was first published in the print edition of The Saturday Paper on Mar 17, 2018 as "Trump’s trade war leaves Turnbull gun-shy". Subscribe here.

Mike Seccombe
is The Saturday Paper's national correspondent.