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Business

09 March 2018

Does this mean war 

Nearly a century ago, two US congressmen, Senator Reed Smoot and Representative Willis Hawley, sponsored a bill to protect American workers by raising tariffs on over 20,000 imported goods. Passage of the 1930 Smoot-Hawley Act sparked tit-for-tat measures worldwide. Over the next five years, as global trade flows plummeted by 66%, America spiraled deeper and deeper into the Great Depression.

US President Donald Trump’s decision to slap a 25% tariff on imports of steel – and 10% on aluminum – reminds many of the folly of Smoot-Hawley. While there’s little doubt that other nations will retaliate, however, it’s far too early to answer the all-important question: Will this unilateral action lead to a global trade war? 

The European Union has already threatened to impose its own tariffs on US steel and a wide range of other made-in-America goods (from motorcycles to peanut butter), while China’s foreign minister has vowed a “justified and necessary response.” 

Trump – who exempted Canada and Mexico as part of what he called a “special case” while seeking broader changes to the North American Free Trade Agreement – left the window open to negotiations with individual trade partners. Tariffs, he said, could “go up or down depending on the country, and I’ll have a right to drop out countries or add countries. I just want fairness.”

Driven primarily by domestic politics, the move could ultimately cost far more US jobs than it creates. 

Moody’s Analytics estimates that 100,000-150,000 American job could be lost because of the tariffs. The Trade Partnership, a consulting firm that researches international trade, reached the same conclusion, arguing that the new policy would increase employment in the US metals industry by roughly 33,000 jobs but decrease employment in other industries by about 179,000 jobs – leading to a net decline of 146,000 jobs, slightly more than total current employment in the US steel industry. 

That’s surely the logic that led to the resignation earlier this week of Gary Cohn, Trump’s top economic adviser, and why over 100 House Republicans voiced their opposition to the tariffs. 

Ignoring such pleas, Trump has now fulfilled a campaign promise. Whether he will be judged by history for repeating the mistake of Smoot-Hawley remains to be seen.