Economist: U.S. Is "On Collision Course With EU" | Wisconsin Public Television

Economist: U.S. Is "On Collision Course With EU"

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Premiere Date: 
March 9, 2018

Economist: U.S. Is "On Collision Course With EU"

With the Trump administration's announced tariff on steel and aluminum, countries in the European Union are firing back with tariffs on American exports such as Harley-Davidson. UW-Madison economist Menzie Chinn discusses what this means for Wisconsin manufacturing and industry. He says the greater 'wiggle room' proposed in later announcements only adds to the uncertainty felt by the market.

Episode Transcript

Frederica Freyberg:

Despite causing consternation among leading Republicans, President Donald Trump this week formally announced his protectionist plans for steel tariffs.

Donald Trump:

Today I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminum. We will have a 25% tariff on foreign steel and a 10% tariff on foreign aluminum when the product comes across our borders. At the same time, due to the unique nature of our relationship with Canada and Mexico, we're negotiating right now NAFTA. And we're going to hold off the tariff on those two countries to see whether or not we're able to make the deal on NAFTA.

Frederica Freyberg:

Speaker Paul Ryan opposes the president's tariffs, saying, quote, I disagree with this action and fear its unintended consequences. The better approach, he says, is targeted enforcement against those practices. Our economy and our national security are strengthened by fostering free trade with our allies and promoting the rule of law. Democratic U.S. Senator Tammy Baldwin says this. Quote, I believe the best way to support Wisconsin workers is to put in place strong "Buy American" standards, renegotiate a better deal on NAFTA and take on China cheating. I also want an exemption, she says, for our European trading partners so Wisconsin’s manufacturing and farming economy isn't hurt going forward. For his part, Governor Scott Walker used a visit this week to Janesville’s Seneca foods to stage his opposition to higher steel and aluminum tariffs. Seneca, with nine plants in Wisconsin, makes their own steel cans for their food products. Higher tariffs may impact their bottom line.

Scott Walker:

That just means that each of these companies are going to have to pay more, dramatically more. In the case of Seneca, you're talking about $25 million more annually to pay for the ten-plate steel they need to use for the products they make here.

Frederica Freyberg:

So just what are the stakes for imports and exports flowing in and out of Wisconsin? Exports that include Milwaukee’s Harley-Davidson motorcycles. Company officials say retaliatory tariffs on Harley bikes overseas would have a "significant impact on sales, customers and retailers." We take those tariff questions to UW-Madison Professor of Public Affairs and Economics, Menzie Chinn. Thanks very much for being here.

Menzie Chinn:

Thank you for having me.

Frederica Freyberg:

Was this announcement by President Trump on these tariffs a surprise?

Menzie Chinn:

I mean, he gave sort of a warning shot last week, so to that extent, it wasn't a surprise. But the very fact that he went through with it in the nature that he did was surprising. And then the very fact that it's not even over, even as we speak, is yet another surprise. That is, he left a lot of wiggle room. And in a way that actually makes things more unsettled than you would have thought a week ago.

Frederica Freyberg:

Because there's a lot of uncertainty as to what it could all mean.

Menzie Chinn:

Exactly. Last week he said 25%, 10% on steel and aluminum respectively as tariffs over the entire spectrum of imports from all sorts of countries. What he did yesterday in his announcement was to exempt Canada and Mexico subject to an acceptable negotiation on NAFTA. And then he also let the door open for further negotiations for any countries that might apply for whatever particular reasons that would come to their minds.

Frederica Freyberg:

So does exempting for a period of time, unclear as to how long yet, Canada and Mexico, does it soften, you know, the tariffs that he has imposed? Does it soften the whole thing for critics of this?

Menzie Chinn:

Well, certainly it would because a good portion of the imports coming into the United States, in fact, Canada is the major supplier of steel imports into the U.S., to the extent you're limiting the number of countries that are being covered by the tariffs, then of course, the average price of imported steel is going to be less than it otherwise would be if you imposed it across all countries.

Frederica Freyberg:

So if the exempting Canada and Mexico is quid pro quo for renegotiating NAFTA, what is that, to your knowledge, President Trump or the administration wants to get out of NAFTA?

Menzie Chinn:

Well, they've said they want to renegotiate some of the terms by which NAFTA is implemented. To me, the biggest ones have to do with domestic content requirements. So, for instance, if you look at an automobile that's made in North America, what proportion of it has got to be U.S. sourced, as opposed to some parts are from Mexico and Canada. And they want to jack up that ratio a lot higher. And so that's a major point of contention.

Frederica Freyberg:

Okay. Back to the tariffs on steel and aluminum. Many Republicans as you know, including our governor, say that this is going to hurt Wisconsin businesses, from beer to motorcycles to cranberries to other kind of agricultural products. How real are those concerns?

Menzie Chinn:

Absolutely. I think there are two sets of concerns you have to address. First is the direct implication of higher steel and aluminum costs. So those are going to feed directly into the cost of production of motorcycles, for instance, or construction, where you use imported steel. So there's this direct impact. Whatever jobs you might say in steel, in general in the other industries that use steel, which are more labor-intensive, you're probably going to have offsetting or more than offsetting job losses. On net you have this direct impact of higher prices for the final goods plus reduced employment in those steel and aluminum-using industries, of which Wisconsin is one of those states that is primarily -- has a lot of this susceptibility to steel prices. Then there's the retaliation issue you alluded to earlier.

Frederica Freyberg:

And that's a real threat as well, even though there's this kind of wiggle room now?

Menzie Chinn:

Well, yes, because, for instance, we have not exempted the European Union and we know what the European Union’s preliminary hit list looks like. As you mentioned, cranberries, but also motorcycles. So in not exempting the European Union, we're on a collision course with them, at least for now. That's definitely a worry for our exporters.

Frederica Freyberg:

Now, is there any concern or likelihood that if this kind of cheap steel isn't available from China without this 25% markup that domestic U.S. producers of goods that use that Chinese steel would move out of the country?

Menzie Chinn:

I don't think it's primarily at this point the access to Chinese steel. In point of fact, China exports a pretty small proportion of steel to the United States at the moment, partly because we have implemented a number of antidumping and countervailing duties against Chinese products. That's the irony of the situation. China is to blame for low steel prices worldwide in part because they have so much excess capacity. They've built so many factories that are putting out steel and to a lesser extent, aluminum that it's depressing the world price. But of that steel, very little comes to the U.S. because we've already implemented protections against that steel. So who are we hitting? Well, before yesterday's announcement preliminarily, we were hitting our allies, Canada, Mexico, South Korea and the European Union as well as the UK. Now you've taken off Mexico and Canada temporarily, but essentially you're not hitting the target you say you want to hit. And an extra point is the measures are being implemented under this national security provision.

Frederica Freyberg:

Right.

Menzie Chinn:

Which is a whole new ball game. We have not had an investigation along these lines for at least 15 years and we've not implemented protections based on this section 232 for as long as I know, many, many decades.

Frederica Freyberg:

Lots of new ball games out there. Menzie Chinn, thanks very much.

Menzie Chinn:

Thank you.

Frederica Freyberg:

Related to all this, "Here and Now" reporter Marisa Wojcik has this background on exports from the badger state.

Marisa Wojcik:

Wisconsin exports totaled $22.3 billion in 2017. Industrial machinery was the state's largest export, at $2.4 billion. The majority of Wisconsin exports went to Canada, totaling $6.9 billion. Mexico was the next highest, receiving $3.2 billion in Wisconsin exports. Exports to Canada grew by 4.3% from 2016 to 2017. Exports to Mexico grew by 4.8%. Other top exports from Wisconsin include electronic equipment, vehicles and plastics. Other top countries Wisconsin exports to include China, Saudi Arabia and Japan. Find more at wpt.org.

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