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Last week saw two trade events which appear to matter a great deal. First, the Trump administration applied steel and aluminum tariffs, either to create jobs or trigger a trade war, depending on who is speaking. Second, the “TPP-11” — the Trans Pacific Partnership without the United States — was signed. If you forgot about both over the weekend, good move, as neither will actually affect the American economy.
Listening to all the hype over tariffs and TPP, this may seem shocking. But combined U.S. imports of steel and aluminum fell short of $50 billion in 2017, versus total imports of goods and services of $2.9 trillion. That’s 1.7 percent of the total for steel and aluminum. Of course, we’re still going to import some steel and aluminum. It will just be more expensive.
If going from 1.7 percent to, say, 1.2 percent of total imports does not seem interesting, it gets less interesting. Because the American economy is so big, trade is relatively small. Purchases of all imports were equivalent to less than 15 percent of U.S. economic transactions, or gross domestic product. Purchases of steel and aluminum imports were 0.2 percent of GDP last year.
A year from now very few Americans will have noticed steel and aluminum tariffs. More might notice foreign retaliation. It’s true that invoking national security to justify tariffs leaves the United States open to other countries doing the same. But exports of steel and aluminum to the United States were less than 0.1 percent of the rest of the global GDP. Retaliation from other nations will also be minor.
A 25 percent tariff on steel is a major change applied to a product that is not nearly as important as it was 50 years ago. The TPP-11 has the opposite problem: The countries involved are important as a group, but the trade changes they just signed on to are not.
The TPP-11 represents 13 percent to 14 percent of global GDP, roughly half the U.S. share. Some refer to the deal as creating a trade bloc, with the United States supposedly suffering from being excluded. The number of Americans who will actually suffer in any meaningful way might be similar to the number reading this article.
If it had been ratified here, the original TPP was going to have a negligible effect on the United States. This could be seen either through a careful read of the document — including its many, many carve-outs where participants do not follow their own rules — or through properly cautious modeling. The raw numbers can sound large, but like metals imports, they pale against the enormous American economy.
Moreover, the TPP-11 is weaker than the original TPP. Without access to the U.S. market as an incentive, the TPP-11 countries agreed to less, foregoing provisions while retaining a crushing number of exemptions. Some TPP members are small enough that their economies will improve, but America’s interest there is diplomatic. The TPP remains unimportant to the U.S. economically.
Both sides of the debate exaggerate the influence of trade on Americans. As a force in the economy, trade is dwarfed both by major domestic policies such as tax reform and long-term structural changes such as automation. It requires a very powerful trade action to affect everyday life. Tariffs on metals and the TPP-11 do not qualify. But two other trade matters could.
The Trump administration is, correctly, seeking an update of the 24-year-old North American Free Trade Agreement. U.S. trade with NAFTA partners is $700 billion larger than the rest of the TPP-11. Two countries are far easier to deal with than 11, and we’ve reached a pathbreaking agreement with Canada and Mexico before. Compared to NAFTA success or failure, the TPP-11 is an afterthought.
Canada and Mexico are our number two and three trade partners. China is our number one. Global steel exports by China were less than 2 percent of its total in 2017. Steel tariffs are a pinprick for the Chinese. But the Trump administration is also examining coercive Chinese practices to acquire technology, known as the Section 301 inquiry.
Under Section 301, U.S. retaliation could hit almost anywhere. Since Chinese telecom is arguably built on improperly acquired technology, one obvious target is telecom equipment. American imports of Chinese telecom equipment were $84 billion last year, easily outstripping steel and aluminum from all countries.
The Section 301 penalties can also be steeper than the metals tariffs, extending to outright bans. While sanctions against Chinese technology practices are long overdue, they could bring serious trade conflict, not the kitten fight over steel. And if the United States can conclude a NAFTA upgrade, TPP-11 will immediately be economically irrelevant. Last week was just a taste of the real trade action.
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