Trade war? Trump slaps huge tariffs on steel, aluminum

President Donald Trump's goal is to incentivise US companies to buy steel and aluminum from US producers so the domestic metal industry strengthens. Picture / AP

President Donald Trump has finally done it. After nearly a year of threatening to upend global trade, he has announced sweeping tariffs on steel and aluminum.

What this means is steel made in another country and shipped to the United States will be subject to a 25 per cent tax. And imported aluminum will be hit with a 10 per cent tax at the US border.

These are hefty fees because Trump's goal is to incentivise US companies to buy steel and aluminum from US producers so the domestic metal industry strengthens.

Trump argues that he needs to do this to save jobs and protect national security. His Commerce Department put out two lengthy reports recently arguing that the United States needs larger steel and aluminum industries to have enough metal for F-18 and F-35 fighter jets and armored military vehicles.

Politically, this should make Trump even more popular with some members of his blue-collar base.

Many of the jobs that might come back in steel and aluminum factories would be union jobs that pay more than US$20 ($27.52) an hour. (For other blue-collar workers, including those who help move foreign metal into the United States or work for manufacturers who will now be spending more on steel and aluminum, it's less of a boon.)

But mainstream Republicans, especially the Wall Street and business crowd, are not happy. Many Republican lawmakers urged Trump to do only a small tariff targeting China.

Trump dismissed these concerns and announced a tariff on steel and aluminum imports from everywhere in the world, even allies such as Canada.

Economically, this is risky move for Trump. There's a reason trade experts such as Chad Bown of the Peterson Institute for International Economics call this the "nuclear" option on trade. There will be consequences, and some are likely to be unpleasant. Here are three potential consequences of Trump's dramatic trade action.

The prices of many products, including beer and cars, are likely to rise. If you drink beer, soda or LaCroix, you probably get it from an aluminum can. If you drive a car or truck, it probably has some steel and aluminum in it. You get the idea. Steel and aluminum are used in a lot of everyday products. The whole goal of Trump's tariff is to get prices of these metals to rise domestically so it's profitable enough for US producers to make more steel and aluminum and employ more people.

Those price increases are likely to be passed on to consumers.

There's a big debate about how hefty the price jumps are going to be. Century Aluminum CEO Michael Bless, who has pushed vigorously for the tariffs, argues that the price of a typical passenger car (think the US$35,000 variety) would rise by just US$35. But the auto industry laughs at that figure, saying it will be much higher, as there are costs associated with finding new suppliers and potentially having to alter the manufacturing process, as not all metal is perfectly interchangeable.

China, Russia and even Canada are likely to strike back. Trump likes to talk about how China is dumping a lot of cheap steel and aluminum into the United States, killing America's domestic metal industry. But the reality is that Canada - a close ally - sends by far the biggest volume of these metals to the United States.

The top four countries that send steel to the United States are Canada, Brazil, South Korea and Mexico. The top four countries that send aluminum to the United States are Canada, Russia, the United Arab Emirates and China.

These are powerful nations that are likely to fight back. The traditional response is to make a formal complaint at the World Trade Organization, but that can take years to get a ruling. China, Canada and others could decide to retaliate right away by putting tariffs on some U.S. goods coming into their countries.

The most likely target is US agriculture products and airplanes. These are top US exports to other countries and would likely hurt Trump's base in the Midwest. China is already discussing retaliatory measures. In short, a global trade war could easily unfold.

Three per cent growth - and some jobs - could be in jeopardy. The economy has been on an upswing lately, and some experts predicted the United States could even hit Trump's goal of 3 per cent growth this year because of the tax cuts. But a trade war, even a small one, threatens growth.

If other countries hit core US industries such as aerospace, that would ding growth. American consumers, the driving force of the US economy, could also get angry if prices of many items jump.

The Trump administration argues that it is doing this to save good jobs. Steel and aluminum jobs have declined by the thousands in the past decade.

But the jobs saved in one industry could be offset by jobs lost in other industries if prices rise and buyers dry up for items such as cars.

Former president Barack Obama put a tariff on Chinese tires in 2009, but it backfired, many economists say. Obama touted the 1,000 jobs saved, but the Peterson Institute says that more than 3,000 jobs were lost in other industries.

Bonus worry: Trump has just given every country (especially China) the perfect excuse to play nasty on trade.

Another concern is that Trump is reviving a rarely used argument - national security - to justify these tariffs. He's doing this by a law known as Section 232 of the Trade Expansion Act of 1962. The United States hasn't imposed trade restrictions because of Section 232 since 1983 (in a case about machine tools).

This tariff opens the door to every other country following America's lead and claiming they need to protect some of their domestic industries.

"That's the real threat," said Jennifer Hillman, a professor at Georgetown Law and former member of the WTO's Appellate Body.