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Get to Know Section 232

Irwin M. Stelzer

Just when it looked as if the professionals in the Trump administration had taken over administration of trade policy, leaving the president to handle the rhetoric, someone in the Trump camp recalled that some 70 years ago—in 1947—23 nations signed the General Agreement on Tariffs and Trade (GATT), which in 1995 became The World Trade Organization, now with a roster of 163 countries. With the rest of the world’s major economies reeling from the destruction of WWII, American participation in GATT was both an act of generosity and of self-interest: We needed a recovered world with which to trade.

Flash forward 70 years. The stricken economies of 1947 are now selling more of their stuff to us than we sell to them. That, Trump can’t abide, and no urging that he dip into his dog-eared copy of The Wealth of Nations can persuade him to give up an evening of tweeting.

To get agreement on GATT, the drafters had to include an escape clause: If imports threaten national security, the importing country can levy super-high tariffs on those products. In the United States, Section 232 of the deceptively named Trade Expansion Act of 1962 allows the president to initiate an investigation to determine whether our security is indeed threatened by imports, which threat can include “substantial unemployment … decrease in government revenue … displacement of any domestic products by excessive imports,” among other impacts. This broad definition of a threat makes the policy options virtually unlimited.

Which brings us to steel, for starters. America is the world’s largest importer of steel, U.S. production of which Trump has promised to revive. So he asked Secretary of Commerce Wilbur Ross to advise whether imports trigger Section 232. Ross already has announced that he plans to “stop the dumping” by imposing super-tariffs or quotas or some combination of the two. In his earlier, private-sector life Ross bought three clapped-out steel companies, combined them into the International Steel Group, benefitted from a 25 percent rise in the price of steel resulting from a 30 percent tariff on steel imposed by George H.W. Bush, and sold the Group to Laksmi Mittal for $4.5 billion, netting his investors $260 million. He understands the power of steel tariffs.

And what is going on in the industry? China’s steel industry is lumbered with huge excess capacity. Rather than close the plants and lay off Chinese workers, the regime subsidizes the inefficient, pollution-spewing plants, and dumps the steel on world markets, depressing prices. That causes steel plants in other countries to shut down. In effect, China is exporting unemployment along with its subsidized steel.

Ross’ report is due next week.

Germany, the largest European steel exporter to America, is leading a group of countries lobbying the Defense Department, charged by Section 232 with responsibility to advise Ross, to use its influence to head off these duties. After all, how can imports from trusted allies be a threat to American national security?

That argument will be a tough sell when the issue gets to the president’s desk. For one thing, he has recently returned from Germany, which runs an overall $65 billion trade surplus with the U.S., 35 percent higher than a decade ago. He believes it is “bad, very bad” that Germans sell $15.4 billion more of its cars to us than they buy from US manufacturers. Trump threatened to hit BMW and other makers with 35 percent duties if they try to import vehicles from their plants in Mexico. It is unlikely that Kevin Hassett, the new, admirable chairman of the President’s Council of Economic Advisers will be granted presidential face-time to explain the fallacy of trying to balance trade for individual products.

For once, Trump has allies. IMF Managing Director Christine Lagarde and France’s new president, Emanuel Macron, both have asked Chancellor Angela Merkel to stop exploiting the fact that the euro is an undervalued currency, and to begin taking steps to reduce its trade surplus, which is damaging the economies of southern Europe.

There’s worse in store for German lobbyists trying to persuade Trump not to hit their steel industry with tariffs. Their argument that we can trust them not to harm our national security by withholding steel we need because they are, after all, allies, is to Trump a bit rich. Germany contributes 1.18 percent of its GDP to the NATO budget. That’s almost $28 billion short of the 2 percnet it promised—annually. It is the largest shortfall of the 22 allies who are refusing to meet their commitments. If Trump repeats past performance, and presents a bill to our allies, it will be for $189 billion for 2016. If available, that sum would fund a 32 percent increase in the budget of the U.S. Department of Defense. Which our European allies will wish they had supported when Putin decides to reproduce his successes in Georgia and Ukraine by moving on NATO members. Count on Trump to raise the missing $189 billion at the G20 meeting in, conveniently for him, Hamburg on July 7-8.

The newfound interest in national security as a reason for curtailing imports on specified items was heightened by the publication by Bloomsbury of Victoria Bruce’s Sellout. Criticized by a Wall Street Journal reviewer as a polemic with an excessive reliance on purple prose, it nevertheless reminds policymakers of China’s near-monopoly of the manufacture and processing of so-called rare-earth metals used in the manufacture of military hardware as well as consumer products. China “could shut down exports on a whim and ultimately cripple the U.S. armed forces,” writes Ms. Bruce. Presumably it could also do so in a face-off with the U.S. over the South China sea, or the defense of South Korea, or American action against its ally, North Korea.

This is a warning that should be taken seriously by Trump, who considers it a triumph of his Mar-a-Lago dinner table diplomacy that he is making it easier for Chinese companies to acquire U.S. assets. They did acquire a company that processed rare-earth elements to make magnets for the military—and shut down its American factory while retaining ownership of its technology.

Protection is a dirty word in some congressional circles, which restrains Trump from disassembling the post-1947 global trading order. But everyone favors increasing our national security. Which is why Section 232 is being readied for use, with steel imports the first target. Aluminum is next.

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