US's Tariff Increase on Imports

Why in news?

The US President Trump has imposed heavy tariffs on steel and aluminium imported from all countries except Canada and Mexico.

What is the new tariff plan?

• Trump has recently signed two proclamations on levying increased import duties.
• They impose a 25% tariff on steel and a 10% tariff on aluminium imported from all countries except Canada and Mexico.
• The tariffs will take effect in 15 days.

Why is US tariff decision questionable?

• The US has used the national security clause of the Trade Expansion Act to increase duty.
• The US is both an exporter and importer of these items.
• Notably, it meets 70% of its requirements from the domestic sources.
• So there is no obvious threat to national security from imports as claimed by the US.

How is tariff decision and US's WTO commitments related?

• Bound Duty - The WTO makes member countries notify the bound duty (the ceiling duty) for each product.
• A country cannot increase its import duty for a product above this level.
• In fact, the actual import for a product takes place at the applied duty, which is generally lower than the bound duty.
• The difference between the bound and applied duty is called ‘water’ in trade language.
• US's commitments - For the US, the 'water' is less than 1% on most items.
• So, if the applied duty on a product in the US is 3%, the country can increase it up to 4% and not higher than that.
• This low 'water' is the suo moto commitment taken by the US at the WTO.
• This was taken with the conviction that low import duties are a must for national development.
• Since the US cannot increase duties under this, it has used the WTO security exception for the present duty increase.
• Clearly, the decision of choosing a low water policy by the earlier US governments has restricted Trump’s policy options.
• He had earlier expressed his dissatisfaction with the trade deals and reasoned it for US's trade deficit.
• Other Countries - The EU, Japan, and most other developed countries have also chosen for less than 2% water.
• However, most of the developing countries did not agree with the US on this then.
• They chose to retain high water for most products, so as to raise the applied duty up to the level of bound duty when needed.
• As a result, if India raises duty on steel from 10% to, say, 20%, it does not violate the WTO law, as the bound duty on steel is 40% for India.

What are the implications?

• Cost - Trump’s decision has domestic and trade costs. A 25% duty on steel will increase the domestic steel price by 5%.
• This could lead to an increase in the input cost for some industries, further leading to high cost of their products for consumers.
• This may create inflationary pressure, leading to high-interest rates and dollar appreciation.
• This may have negative impact on both the economy and exports.
• Industries - Many steel and aluminium user industries may not compete at higher costs.
• They may have to shut down, leading to job losses.
• China - The largest supplier of steel and steel products to the US is China and not Canada or Mexico as widely reported.
• China could retaliate by making import restrictions from the US, which may become disadvantageous for the US firms.
• It has already started investigations into the billion dollar imports of the grain sorghum from the US.
• China could also dump some of the $4 trillion US Treasury bonds it holds, creating disruption in the US market.
• Other Countries - The affected countries are already talking about taking retaliatory measures.
• Countries may also take the US to dispute settlement at the WTO.
• The duty decision is potential of further weakening the multilateral trade architecture.
• Steel Sector - The US duty on steel and aluminium also mean that the global surplus would have to be dumped in some other countries at a lower price.
• The steel sector already plagued with excess capacity would face more turmoil.

What are the implications for India?

• The protectionist measure by the US and potential counter-measures by other countries might hurt the steel industry globally.
• This might put downward pressure on steel and aluminium prices.
• This is a cause of worry for Indian metal companies as manufacturers have to look for newer markets.
• Indian metal producers with exposure to Europe and the United States already warned of increased costs and lower sales.
• This might affect the recent recovery in the volume growth and profitability of metal producers.
• A downward pressure on the stock price of metal companies would also make it tough to raise fresh equity capital for debt-repayment or capacity expansion.

Source: Business Line