Here’s Proof That Trump’s Trade War With China Could Be a Disaster
Policy + Politics

Here’s Proof That Trump’s Trade War With China Could Be a Disaster

© ERIC THAYER / Reuters

Donald Trump has been a bit light on policy proposals, especially when it comes to the economy.

He has said, however, that as president he would raise tariffs on Chinese goods (he's tossed around the number 45%) because the country is "cheating" with its low prices in the global marketplace.

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So what would this look like? What would be the consequences of aggressive tariffs on global goods?

There's at least one place where we can see how a trade war with China would play out for the US: the steel industry. For over a year it has been ravaged by anemic demand and rock-bottom prices. China's incredible output of steel hasn't helped matters, and the world has been asking the country to slow its production. In fact, the US has been taking measures to shore up the price of domestic steel since the Bush administration.

Results have been muted. Last month the US Senate held a hearing on the Chinese economy called "Evaluating the Financial Risks of China," and it focused largely on what China's low steel prices coupled with that country's own economic slowdown had done to American steel.

I'll spare you some reading: It hasn't been good.

"The damage that has been done to the industry has been extreme," Thomas Gibson, the president of the American Iron and Steel Institute, said at the hearing.

This after US Steel, in April, announced that it would be laying off 25% of its nonunion workforce.


None of this is to say that the US hasn't taken any recent action. In May the US hiked duties on Chinese steel by 500%. The European Union is also taking measures to slow the flow of Chinese steel into its market.

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But of course that isn't the end of it by any means. China is in a precarious position. The country grew its economy by selling steel (among other commodities) to the world and also by using steel to build its massive cities (both empty and filled).

But now the Chinese economy is slowing down. The government also wants to depend less on industry and manufacturing and grow its services sector, things like banking and retail.

But it still has a huge steel industry that employs millions of people. The government has said it will fire millions in the coming years as the industry winds down. That will be painful, though, and the Chinese government has not shown that it has a tolerance for pain. Its steel mills are still operational, and its steel workers are still employed.

The country has said it will reduce steel capacity, but those promised reductions don't always materialize.

At the congressional hearing, Gibson said that from 2011 to 2015 the Chinese government claimed that 90 million tons of overcapacity in its steel market had been taken care of. In reality, 300 million tons had been added to China's steel output.

"They don't use the word 'net,'" he said.

After the US slapped on that 500% tariff, China said it would continue a controversial tax rebate for its steel exporters.

So this is it people. We've got ourselves a nice little trade war on our hands.

What would Donald do?

And how's the war going? The Australian bank Macquarie published a note on that on Wednesday.

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"July's global steel crude output data, as released by worldsteel yesterday, shows world ex-China output to have recovered to positive YoY territory for the first time in over 18 months," analysts wrote. "This, coupled with China's relative resilience reinforces the view that the global industrial recovery is gathering some momentum."

Sounds good, right? It sounds as if global steel demand is starting to come back. The bank says Asia is leading the recovery with increased Korean and Japanese steel consumption. Smaller countries are doing better too, though they might be getting force-fed steel by China (and that can't last).

The problem is that steel demand isn't coming back in the US, and Macquarie blamed "tariff-induced higher prices" for this, even though the US economy is stable.

"While output has been carefully managed by US producers to help maintain the tariff-driven price premium over other regions, apparent demand is clearly not good at -10% YoY over 2016 to date," analysts wrote. "While destocking can explain part of this, we would reiterate our concern that higher steel prices are hurting US manufacturing competitiveness (and thus steel demand). As our recent note showed, the US is the biggest negative drag on global industrial production at the present time."

So while higher prices are helping the US steel industry to some degree, they are hurting manufacturers who have to buy that steel.

"There's grumbling that the US mills are taking advantage of a tight market, and the price hikes are too much, too fast," Lisa Goldenberg, the president of Delaware Steel Co. of Pennsylvania, a steel trading and processing company, told The Wall Street Journal.

Trade battles, it turns out, are less like war and more like whack-a-mole. You bring the hammer down on one problem, and another arises soon after.

Meanwhile, some in the steel industry would prefer Trump change his part of the conversation on tariffs and steel.

"I don't think he does our issue any favors by making it so incredibly jingoistic and bombastic," said Scott Paul, the president of the Alliance for American Manufacturing, a group that allies domestic steelmakers and other manufacturers with the United Steelworkers union, told Reuters.

Perhaps someone should let Trump know that.

This article originally appeared on Business Insider. Read more from Business Insider:

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