The European Union, Canada, and Mexico have hit back at the U.S. administration’s decision to impose tariffs on steel and aluminum imports, escalating fears of a trade war. Trade penalties of 25 percent on imported steel and 10 percent on imported aluminum took effect at midnight May 31.
A temporary exemption had been granted to the three trading partners after the United States decided on March 8 to impose tariffs. The move was driven by concerns that excessive steel and aluminum imports were threatening the domestic steel and aluminum production industries, as well as the United States’ ability to meet defense and infrastructure demands in a national emergency.
The United States reached agreements with Australia, Argentina, Brazil, and South Korea on steel, and with Australia and Argentina on aluminum, according to a May 31 statement from the White House. However, U.S. efforts to reach agreements with the EU, Canada, and Mexico by a June 1 deadline failed.
“We take the view that without a strong economy, you cannot have strong national security,” U.S. Commerce Secretary Wilbur Ross told reporters.
The announcement drew sharp criticism from European Commission President Jean-Claude Juncker, who said in a statement that the move was “protectionism, pure and simple,” and was at odds with WTO rules. He also argued that the EU is not the source of overcapacity in the steel sector.
The commission had continuously engaged with the United States at all levels to address overcapacity in the steel sector and tried to negotiate ways to improve bilateral trade relations with the United States, Juncker said. But “the EU will not negotiate under threat,” he added. The U.S. measures affect EU exports worth €6.4 billion in 2017, according to the commission statement.
“Today is a bad day for world trade,” EU Trade Commissioner Cecilia Malmström said. “We did everything to avoid this outcome.” The United States also used the threat of trade restrictions to extract concessions from the EU, according to Malmström.
“This is not the way we do business, and certainly not between long-standing partners, friends, and allies,” Malmström said. “Now that we have clarity, the EU’s response will be proportionate and in accordance with WTO rules.” The EU will launch a dispute settlement case at the WTO against the United States on June 1 and plans on imposing rebalancing measures to protect the EU market, she said.
Mexico struck back at the United States by announcing equivalent tariffs on a range of American imports, including flat steel, pork, fruit, and cheese, which is expected to hurt U.S. farm exports and affect commodities pricing. The government said the measures would remain in place until the United States lifts its tariffs.
Canadian Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland announced at a press conference that Canada would impose $16.6 billion of retaliatory duties on American steel and aluminum products, as well as other products, representing the value of 2017 Canadian exports that are affected by the U.S. tariffs.
U.S. goods that will be subject to a 25 percent surtax include iron or non-alloy steel wire and flat-rolled products of iron or non-alloy steel, according to a Department of Finance notice. Goods subject to a 10 percent tariff include cucumbers and gherkins, toilet paper, roasted coffee, maple syrup, and beer kegs. The government will publicly consult on the countermeasures until June 15, and they will take effect July 1.
“This is the strongest trade action Canada has taken in the postwar era. This is a very strong response, it is a proportionate response, it is perfectly reciprocal,” Freeland said. She assured Canadians that the measures were a “very strong Canadian action in response to a very bad U.S. decision.”
The U.S.’s decision comes as G-7 finance ministers kick off a meeting in Whistler, British Columbia, under the Canadian G-7 presidency. “Among friends, sometimes you have disagreements,” said Canadian Finance Minister Bill Morneau during a May 31 press conference, adding that he will clearly state to U.S. Treasury Secretary Steven Mnuchin Canada’s opposition to the U.S. tariffs. “We think it’s absurd that Canada is in any way considered a security risk. I have every expectation that our other allies around the table will express the same sentiment,” Morneau said. “And with that, we’ll try to move forward in a way to encourage them to reconsider their decision that we think is not in anyone’s best interests.”
China’s State Council, meanwhile, decided to cut tariffs on several imported goods in response to U.S. tariffs on steel and aluminum imports. Average tariff rates for such items as clothes, shoes, household appliances, cosmetics, and cleaning products will drop starting on July 1, according to a May 31 statement. China also plans to abolish or relax restrictions on foreign investment in several manufacturing sectors, including automobiles and aircraft, and to introduce measures to encourage foreign investment.
Economists credit the expansion of China’s steel and aluminum manufacturing capacity as causing significant pricing pressure on those products. The European Steel Association (EUROFER), which represents all the steel manufacturers in the EU, called for the EU to act swiftly to defend its internal market from being flooded with imports that will be diverted from entering the U.S.
“We regret that the U.S. has taken this unnecessarily damaging step,” said Axel Eggert, director general of EUROFER. “We support the commission in its responses to the U.S.’s trade action and urge all EU stakeholders to remain united in order to face down both the U.S.’s measure and the incoming inundation of deflected steel products,” he added.
The Confederation of British Industry has also weighed in. Overproduction can distort the global market and erode the level playing field that businesses depend on to stay competitive, according to CBI International Director Ben Digby. “But this is a shared challenge whose root causes should be tackled jointly by the EU and the USA,” Digby said in a statement. “There are no winners in a trade war, which will damage prosperity on both sides of the Atlantic.”
The tariffs could lead to a protectionist domino effect, damaging firms, employees, and consumers in the United States, United Kingdom, and many other trading partners, Digby warned.
Tax Fallout From Trade Wars ?
A potential trade war could fuel tax tensions as well. For example, trade concerns with the United States have led to speculation that Germany is wavering in its support of the commission’s recent proposals to tax the digital economy.
Germany had been a major proponent of unilateral action ahead of global agreement at the OECD in 2020. The commission then revealed its proposals on March 21, including a temporary 3 percent revenue-based tax on companies with annual worldwide revenue exceeding €750 million and total annual revenue from digital activities in the EU of more than €50 million.
Speculation has since grown that Germany is wary of moving forward with the proposal, which is seen as targeting mostly American companies, without an EU exemption from the U.S. tariffs on steel and aluminum.
It is not clear whether the U.S. tariff announcement will have any effect on Germany’s position on the commission’s proposals.
By Teri SPRACKLAND and Stephanie SOONG JOHNSTON
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