Issue No. 3

• President Trump says he’ll place 25% tariffs on metals from around the globe, risking the destruction of the North American prosperity system and an all-out trade war.

• The on-again, off-again measures over eight years that have led to the current disruptive state of affairs.

• The Administration’s justification for new tariffs in North America does not stand up to the actual data on imports.

• The incoming Commerce Secretary claims that steel jobs rose by more than 100,000 when Trump first imposed tariffs in 2018. That is not close to true.

• Economic studies find that the original steel tariffs backfired. Prices rose, consumers paid, and jobs dropped.

• Business leaders in Monterey remain confident despite U.S. threats.

• For the European Union, options include negotiation, retaliation, and the “bazooka.”

Trump Now Proclaims 25% Steel and Aluminum Tariffs on North America and the World. An Act of ‘Self-Mutilation’ by the U.S.?

After postponing wholesale tariffs on Mexico and Canada for a month, Donald Trump issued a proclamation on Feb. 11 placing 25% duties on steel and aluminum imports from the entire world.

In a New York Times op-ed two days later, Chrystia Freeland, former deputy prime minister of Canada, called the tariffs “an act of self-harm — economic self-mutilation — by the United States.” She added that the “new import taxes…suggest the United States is making a historic change in its understanding of who its friends are, and indeed of whether it is interested in having any friends at all.”

The new tariffs, scheduled to take effect March 12 at 12:01 a.m., will erase existing exemptions on imports from Argentina, Australia, Brazil, the EU countries, Japan, South Korea, Ukraine and the United Kingdom – and, of course, Canada and Mexico. 

President Trump also said there would be no exceptions or exemptions – though countries like Australia and Japan are already trying to make a deal.

If Trump goes ahead as planned, the tariffs will almost certainly touch off a North American trade war, with Mexico and Canada retaliating in kind, as they did in 2018.  It could also mean the destruction of the U.S.-Mexico-Canada Agreement (USMCA), which set the ground rules for free cross-border commerce among members of the world’s most successful trading bloc.

Immediately after the agreement went into effect, Trump told workers in Michigan: “The USMCA is the fairest, most balanced, and beneficial trade agreement we have ever signed into law. It’s the best agreement we’ve ever made.”

The trade war, if it comes, appears completely unnecessary. Any North American trade difficulties can be ironed out over the course of the next year during the scheduled USMCA review. Meanwhile, driving a wedge between the partners will be a boon to the main U.S. antagonist, China. Mexico, especially, has been cooperating to prevent Chinese transshipments to the U.S., but what if USMCA cooperation dissolves?

The truth is that the U.S. needs Mexico and Canada in order to achieve its economic goals against China. Shorter, more secure supply lines, with fair, free-flowing trades pulsing down them are the answer – not tariffs that will cripple North American economies.

---

How Did We Get to the Brink of a Trade War?

It took eight years to get to this point. On April 20, 2017, President Trump, concerned about the future of U.S. manufacturing, asked Commerce Secretary Wilbur Ross to begin an investigation under Section 232 of the Trade Expansion Act of 1962 into the effects of imports of the metals on U.S. national security.

On Jan. 11, 2018, Ross declared officially that the imports impaired national security, and in March, Trump issued Proclamation 9705 imposing tariffs throughout much of the world. But in the proclamation, Trump stated, “I conclude that Canada and Mexico present a special case” because of…..

shared commitment to supporting each other in addressing national security concerns, our shared commitment to addressing global excess capacity for producing steel, the physical proximity of our respective industrial bases, the robust economic integration between our countries, the export of steel articles produced in the United States to Canada and Mexico, and the close relation of the economic welfare of the United States to our national security.

It was an excellent statement of the partnership among North American nations, and Trump decided to “exempt steel articles imports from these countries from the tariff, at least at this time.” But then he changed his mind in May and slapped the same duties on Mexican and Canadian steel.

Mexico and Canada quickly responded with tariffs of their own on U.S. imports. Among other tariffs, Mexico placed 25% duties on steel and bourbon and 20% on pork and applies. Canada retaliated against $16.6 billion worth of U.S. imports of steel, whiskey orange juice and more.

Then, on May 17, 2019, the North American nations reached an agreement to lift both the metals tariffs on U.S. imports and the retaliatory duties. The Joint Statement that memorialized that agreement provided that the parties could act individually against “surges” and set up a process for retaliation – but only against steel or aluminum.

Over roughly this same period, the USMCA, a modernization of NAFTA, was being negotiated. It was signed Nov. 30, 2018, at the G20 Summit but took over a year and a half to be ratified by the three parties. It went into effect in July 2020, solidifying the free-trade platform that had prevailed in North American for a quarter-century.

During the Biden Administration, steel and aluminum tariffs were lifted on Japan, the EU and a few other parts of the world. Now, Trump says he will reinstate them. An unresolved question is whether Section 232 tariffs, which require a national security justification, can merely be reapplied after a long hiatus (nearly six years in the case of Mexico and Canada) or if the Administration has to go through the process laid out in the statute, including a new investigation by the Commerce Department.

---

The Reasons Cited for Re-Imposing Steel and Aluminum Tariffs Don’t Fit the Facts

Why does the President want to put tariffs back on? Trump says in his new proclamation “that The Secretary has informed me that imports of steel articles from Canada and Mexico have increased significantly to levels that once again threaten to impair U.S. national security.” This claim is utterly inaccurate.

First, Mexico and Canada are reliable allies of the United States. None of this is about national security, which is threatened not by our reliable partners but by China, which will be the winner if the USMCA is unravelled.

Second, the USMCA and Joint Statement forbid unilaterally raising tariffs on steel and aluminum without an explicit process being followed.

Third, it is a flat lie to say that imports of steel have “increased significantly.”

Let’s look closely at the data. The proclamation says that steel “volumes from both Canada and Mexico increased overall, from 7.77 million metric tons in 2020 to 9.14 million metric tons in 2024.” Remember that 2020 was the year of COVID-19, when manufacturing around the world dropped 6.8% from the year before. It is meaningless to use 2020 figures as a base unless you are trying to distort results.

As we noted, the original steel tariffs were enacted in May 2018 and lifted for Mexico and Canada in May 2019. So 2018 should be the correct base year. In that year, U.S. imports of steel from Mexico were 3.5 million metric tons; in 2024, imports were 3.2 million tons.[1] As for Canada, U.S. imports went from 5.6 million tons to 6.1 million tons. In total, the increase was from 9.1 million tons to 9.3 million – or a few tenths of a percentage point a year. Hardly “significant.”

The only argument that the Administration can make for increased metals exports from Mexico and Canada is that exports of certain “product lines” have risen. But the Joint Agreement of 2019 lists 55 product lines for steel alone, and the U.S. has been boosting exports from many of those product lines. Risking a trade war over “long reinforcing bars” is an absurdity. Discussions about steel categories should be undertaken this year in the scheduled USMCA review.



The President is declaring enormous global tariffs at a time when, overall, U.S. steel imports have been dropping. Just look at this chart from the U.S. International Trade Commission. The blue line is imports; the orange line exports.



[1] Note that we are interpolating here. Imports through November (latest month) were 2.9 million tons in 2024 for Mexico and 5.5 million in 2024 for Canada.

U.S. steel imports fell from 30.6 million tons in 2018 to 26.2 million in 2024. If you want to use 2017 as the base year, the decline is even greater, from 34.5 million tons. You can find these data here and here.

Import penetration in the U.S. (that is, the proportion of imports to consumption) has been falling since 2017 and 2018, as you can see in this ITC graph:

Finally, in recent years, the value of U.S. imports from Mexico has fallen precipitously. This graph from the ITC shows that Mexico received nearly a third less revenues from its exports to the U.S. in 2023 than in 2022.

The decline continued through 2024, with a drop of about $700 million each for Canada and Mexico (as of November) compared with a year earlier.

The truth is that the United States has not suffered a glut of imports in recent years. The threat to the existence of the USMCA and the risk of an all-out trade war is based on a false premise.



We urge the Trump Administration go to look at the numbers carefully again. There are smart economists in the White House, such as Kevin Hassett, who heads the National Economic Council, whom we doubt have been consulted.

---

An Outlandish Claim About Steel Jobs From Howard Lutnick

Another smart member of the Trump economic team is the nominee to be Secretary of Commerce, Howard Lutnick, the billionaire CEO of the Wall Street firm Cantor Fitzgerald. He has been steeped in the importance of accurate numbers.

Yet when Trump signed his tariff proclamations on Feb. 11, there at his side was Lutnick, cheering him on with false data.

“When you imposed the tariffs the first time, you added 120,000 jobs,” Lutnick said to Trump as the cameras rolled. “And since that time, [the tariffs have] been picked away and nicked away and excluded away, and we’ve lost 107,000 jobs. And remember, these aren’t just general jobs. These are steel workers in America.”

“It wasn't clear how he reached that number,” said an Associated Press report. You can see from this chart, prepared by the St. Louis Fed using Bureau of Labor Statistics data, that there has not been a total of 120,000 steel workers in the U.S. in a quarter-century.

In fact, in 2018, the year the tariffs went into effect, there were 84,100 steel jobs in the U.S.; by 2020, the end of Trump’s first term, there were 82.300. That’s decline of 1,800. If we use 2017 as the base year, there’s a smaller decline: 200 jobs. But still, jobs went down, not up.

We have no idea where Lutnick’s figure of a 107,000 loss (“picked away and nicked away”) comes from. Actually, between the end of 2000 and the end of 2023, steel jobs rose by 1,300.

There is no doubt that the U.S. steel industry is languishing, but Mexico and Canada are not to blame. The cause has been understood for decades: inadequate capital investment. A General Accounting Office report in 1981 concluded, “The U.S. steel industry faces serious problems. Approximately 25 percent of its physical plant is too old to compete efficiently with foreign producers, and its production capacity has been shrinking relative to domestic needs.” The recent attempt by Nippon Steel to purchase the iconic U.S. Steel is only the latest manifestation of inadequate investment in modernizing plants.

The Commerce Department in 2018 tried to argue that “the loss of revenue has caused U.S. steel manufacturers, both large and small, to defer or eliminate production facility capital investments and funding for research and development.” But this claim has cause and effect reversed. The way to increase revenue is to make the necessary capital investments and R&D.

Tariffs aren’t going to help. They were placed on nearly the entire world for the period 2018 to 2020 and have stayed on for many large countries. But tariffs haven’t solved the problems of U.S. steelmakers or significantly boosted production or employment. The top three U.S. manufacturers rank 15th, 22nd and 24th globally – worse than their rankings in 2017.

All tariffs will do is raise prices for American businesses and consumers. Trump said on Feb. 11, "You're ultimately going to have a price reduction because they're going to make their steel here," adding that there would also be more jobs.

Neither is true. Tariffs increase the price that customers in the tariff-imposing country pay – not just on imports but on home-produced goods as well. If foreign steel that cost $100 suddenly jumps to $125 because of tariffs, the price of domestic steel will rise to meet that price (or come in just under). Domestic producers are certainly not going to charge $100 or $90; they’re going to charge, perhaps $124. And customers will probably buy less – which is why domestic employment doesn’t jump up.

The AP quoted Panos Kouvelis, a professor specializing in supply chains at Washington University in St. Louis, who co-wrote a research paper last year finding that the 2018 tariffs did not deliver as Trump had promised. "Simple economics will tell you if prices go up then demand will go down," Kouvelis said.

---

Economists Find the 2018 Tariffs Backfired, Causing Higher Prices and Lower Employment

Benn Steil, director of international economics at the Council on Foreign Relations, told the Associated Press on Feb. 10, "The costs to the U.S. will include higher prices to U.S. consumers, retaliatory tariffs abroad, and the loss of U.S. jobs and competitiveness in firms hit by higher input costs."

These forecasts are confirmed by many sources, most importantly by an extensive December 2019 academic paper by two Federal Reserve Board economists, Aaron Flaaen and Justin Pierce. They looked at the effects of the “unprecedented tariffs increases” undertaken by the U.S. since the beginning of 2018, as well as the effects of retaliatory tariffs by trading partners “on manufacturing employment, output, and producer prices.”

The researchers concluded:

We find that U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.

These graphs should how “import protection” in the middle can slightly boost employment but “rising import costs” (at left) and “foreign retaliation” reduce jobs far more than any gain.

The researchers point to “the importance of increased costs from tariffs on inputs as a mechanism through which tariffs affect the manufacturing sector, with this channel yielding highly statistically significant effects for both employment and producer prices.”

For example, tariffs raise the price of steel, so the vast number of manufacturers that use steel as an input have to raise their prices as well, which in turn reduces demand from purchasers (think car-buyers) and as factories cut back, employment drops.

Flaaen and Pierce review what has become a substantial economic literature on the effects of the 2018 tariffs. For instance, they cite “Amiti, Redding and Weinstein (2019) and Fajgelbaum et al. (2019) who find near-complete pass-through of U.S. tariff increases to domestic prices.” In other words, tariffs are paid by U.S. consumers. They also cite “Handley, Kamal and Monarch (2019), [who] find that those firms impacted by U.S. import tariffs respond by reducing U.S. exports.”

There are political effects as well: Blanchard, Bown and Chor (2019) find that “retaliatory tariffs can explain a shift in voting away from Republican House candidates in the 2018 election.” And a study in the Journal of Monetary Economics found that policy uncertainty resulting from on-again, off-again tariffs reduces capital investment.

A Feb. 11 Investopedia article reviewed economic studies of previous tariffs and concluded in a headline, “How Trump's Metal Tariffs Could Eliminate 75x More US Jobs Than They Save.” The piece quoted a post by Justin Wolpers, an economist at the University of Michigan, as saying, “The 2018 steel tariffs just called to remind you that steel is produced by a tiny sliver of the economy, but used as an input by a much broader swathe of manufacturers.”

Separately, the ITC, in a 2023 report, found:

U.S. importers bore nearly the full cost of the 2018 tariffs because import prices increased at the same rate as the tariffs. The USITC estimated that prices increased by about 1 percent for each 1 percent increase in the tariffs under sections 232 and 301. Section 232 tariffs reduced imports of affected steel products by 24 percent, increased the price of steel products in the United States by 2.4 percent, and increased U.S. production of steel products by 1.9 percent. 

The report also found that “the higher prices of steel and aluminum translated into higher costs of production inputs for downstream industries. This effect negatively impacted the downstream industries that purchase steel and aluminum because costs increase per unit of production."

---

Business Leaders in Monterey Confident That the Economic Logic of North American Cooperation Will Prevail

“Why Mexico’s industrial heartland is not afraid of Trump’s tariff threats,” said the headline on a Feb. 13 article in the Financial Times.

In making their case, the reporters, Michael Stott and Christine Murray, pointed to Mexico’s position as the “US’s biggest trading partner, exporting $500bn worth of goods north last year.” Mexico in 2024 accounted for 15.5% of U.S. imports and 16.2% of U.S. exports; Canada’s proportions are 12.3% of U.S. imports and 16.9% of U.S. exports. Together, Mexico and Canada buy more than one-third of everything the U.S. sells abroad, and a high proportion of exports from Mexico are sent across by the border by U.S. companies themselves, such as automakers Ford and G.M.



Trump has pledged tariffs on steel and possibly everything else, but Stott and Murray write that “business leaders in Monterrey, where manufacturers make everything from Lego to televisions to car parts for export, are quietly confident that the economic logic of North American free trade will prevail.”

A business lobbyist in Monterey said, “We’ve gone through a Trump administration before.” According to the FT, “the lobbyist recalled that during his first term, the US president vowed to close the Mexican border, then relented when Mexico took the tough line he wanted on migration. ‘We will have frights from time to time, but in the end Mexico is the country which matters most to the US, and Trump knows that.’”

Emilio Cadena, CEO of Prodensa, which helps foreign companies set up manufacturing in Mexico, said that while some companies were in “wait and see” mode, most investors were pushing ahead with their plans. Wrote Stott and Murray, “Certain companies, he said, were thinking of moving manufacturing to the region and investing in both the US and Mexico. ‘Mexico is an enabler of the re-industrialisation in the US.’”

The FT quoted some executives as saying that Mexican business can survive higher tariffs because manufacturing are so much lower. Meanwhile, “All the US business people are lobbying Trump not to tear up their supply chains,” said a Monterrey financier. “They are our allies."

---

How Will the European Union Respond to Tariffs? The Options Are Many

In a piece for the Atlantic Council on Feb. 13, Jacopo Pastorelli wrote about the European Union’s possible responses to Trump tariffs on stee. Feb. 13.

One option is negotiation before the March 12 deadline. The EU could cut its 10% import taxes on U.S. vehicles or buy more U.S. liquefied natural gas (LNG), agricultural products, and U.S.-made defense equipment.

Cutting tariffs on cars would be a preemptive strike. Oxford Economics Group expects the U.S. soon to impose 25% tariffs on EU auto imports. As for LNG, Politico reported on Feb. 4 that Trump is already trying to order around the EU on fossil fuels. ‘The one thing they can do quickly is buy our oil and gas,’ Trump said, when asked how the bloc could avoid threatened tariffs.” 

Pastorelli wrote that should these attempts at negotiation fail, “the EU will likely respond with retaliatory tariffs. A first move could be the reinstatement of suspended tariffs on US steel and aluminum and on notable US exports to Europe, such as Levi’s jeans, Harley Davidson motorcycles, bourbon whiskey, cosmetics, cranberry juice, orange juice, peanut butter, and other agricultural products.”

In 2018, “Brussels hit 2.8 billion euros worth of US exports and held additional levies worth 3.6 billion euros ready to fire,” wrote Pastorelli. “This time, the proposed retaliation would amount to 4.8 billion euros’ worth of US goods. Additional ways to ramp up pressure on Washington might include tightening technical barriers to trade or restricting US companies from European public procurement tenders through its International Procurement Instrument.”

Brussels could also deploy for the first time what’s been called its “bazooka” -- the anti-coercion instrument (ACI), which enables the EU to retaliate against third countries that are “coercing” the European Union, a member state, or a European industry. Wrote Pastorelli: “The set of countermeasures include imposing higher customs duties and export controls, restricting or suspending intellectual property rights, banning services or applying duties to digital platforms such as streaming services, and enforcing investment restrictions and limits on foreign direct investment."