The Daily - Thursday, Mar. 8, 2018

Episode Date: March 8, 2018

In announcing new protections on steel and aluminum imports, President Trump said he was acting in the interest of national security. But could the real threat be the tariffs themselves? Guest: Peter S. Goodman, an economics correspondent for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, in announcing tariffs on foreign steel and aluminum, President Trump said they would protect national security. But what if the threat to national security are the tariffs themselves? threat to national security are the tariffs themselves. It's Thursday, March 8th.

Peter, when's the last time that we were in a big trade war? The 1930s. That's the classic case of trade conflict yielding catastrophe. Peter Goodman covers economics for The Times. From roughly 1870 till the First World War, that's a period that economic historians consider, you know, the sort of first wave of globalization, where there's a lot of trade, a lot of development of new markets, and the world's being knit together in a way in which it had not been previously. And World War I undid that and produced a lot of nationalism, distrust, economic insecurity. decades of the 20th century, where you have this retreat to protectionism, to countries putting tariffs and other sorts of restraints on trade to protect their domestic industries. And the crescendo of this is this 1930s law adopted by a Republican-controlled

Congress called the Smoot-Hawley Tariff Act. A financial panic grips the world. Which comes as the U.S. is sinking into the Great Depression. For the majority, it means the interminable line outside factory gates, desperately hoping for a job that rarely comes. It means hunger and a march of the unemployed in the nation's capital. And the Republicans in Congress resort to protectionism as the fix. They jack up tariffs on hundreds of products to levels that had not been seen in a century. And this is supposed to, you know, put a wall around American factories and farmers

and protect them from the incursions of foreign competitors. But the results are immediately disastrous. Farm prices have dropped disastrously, and a man's work no longer brings him a just return. The threat of foreclosure, of losing house and home, spreads through the conservative farmlands, and radical talk is boiling into action. America's trading partners in Europe, in Latin America, start imposing their own tariffs. So suddenly, American farmers who are supposed to be protected now can't export their wares to other markets around the world. And the economy, which is already in the Depression, sinks deeper into the Depression. It's certainly not the cause of the Great Depression,

Depression sinks deeper into depression. It's certainly not the cause of the Great Depression, but it is widely seen as a cause that exacerbated, deepened, lengthened the Great Depression. And trade grinds to a halt, really, around much of the planet. So even though these tariffs, the Smoot-Hawley tariffs, were meant to be defensive measures to protect the United States economy and its industries. It sounds like it ends up being offensive and very provocative. Well, it certainly has that effect. I mean, when you impede imports from another country, you are effectively hurting the livelihood of the people in that country who make their living selling stuff to you. And they're not real happy about that. And domestic politics in other countries then demands similar retaliation. People are angry and accusatory. And now suddenly, just about every

country, I mean, Great Britain, France, Nazi Germany, responds to these American tariffs with their own tariffs. That's what the effect of the Smoot-Hawley tariffs ultimately had. We had tit-for-tat tariffs. It started in America, but practically overnight an economic blizzard swept the world. In Japan, France, Britain, always the unemployed, the soup kitchens, the grinding poverty, and the despair. So now there are fewer opportunities for everyone. And as a result, European nations that are already feeling tremendous hostility and insecurity toward one another have a new reason to feel that way. I mean, it enhances the nationalistic animosities that have been unleashed

across the continent. There's a blame game, and it's easy to go and blame the people on the other side of a border for effectively damaging your livelihood. And it is certainly a contributor to what becomes World War II. So in this case, a trade war actually is a factor in a real war. It is certainly a factor. So does the U.S. and the rest of the world absorb that lesson after World War II? Yeah, very much so. War II. Yeah, very much so. Capitol Hill in Washington is again the nation's focal point as the 80th Congress convenes during one of the most crucial periods in the nation's history. The Capitol awaits the arrival of President Truman to deliver his message. So the powers

that emerged victorious from World War II, and the United States is at the top of the list, build this new economic order. World economic cooperation is essential to world political cooperation. And the fundamental idea is that if people are tied by commercial interests, if they're trading with one another, if they're engaging in commerce together, then they are less likely to develop murderous impulses to one another. We must now take other steps for the reconstruction of world trade, and we should continue to strive for an international trade system as free from obstructions as possible. This idea is at the center of the global trading order that emerges from the war. First, with the so-called GATT, the General Agreement on Tariffs and Trade, which starts up in the mid-40s, and that gives way in the mid-90s to the World Trade Organization,

which is often described as the kind of referee for global trade. So they're agreed upon rules. There's now 164 members. It operates by consensus. Everybody agrees. If you extend a deal to one World Trade Organization member, if you lower your tariff on some product, then you have to extend that same deal to all the others. And if there are disputes, then you have this institution that adjudicates and looks at the rules and proposes remedies. And it's all about settling disputes before there's a war. So after trade had contributed to a world war, it sounds like a driving idea

behind this global trade agreement was that the opposite of that could also be true, that having friendly, productive trade relationships could actually preserve peace. Yeah, that's exactly right. That the connectedness through trade would be a tremendous disincentive against war, because war would then be disrupting something that depends upon peace to continue. That's the fundamental idea. So has the Global Trade Agreement and the WTO worked in terms of preventing the kind of devastating trade conflicts that we saw in the 1930s?

Yeah, it has. But there have been some flare-ups. I mean, in the early 80s, Japanese production of automobiles is almost twice as great per worker as it is in America. We did come pretty close to a trade war between the United States and Japan. Japanese steel workers outproduced their American counterparts by about 25 percent. When Reagan took on the Japanese over surging exports of cars to the U.S. Now this isn't because they're better workers. I'll match the American working man or woman against anyone in the world. So what happened with Reagan and the auto industry and Japan in the 1980s?

So Reagan comes into office in January 81. The American auto industry is in a generally pretty rough shape. New cars and used cars stand like shining tombstones in the showrooms and parking lots of the nation's car dealers. Unloved, unwanted, and unsold. The 70s was the time of oil shocks. Gas is really expensive. People can no longer afford to run cars that do 12 miles to the gallon.

And Americans have now acquired a taste for lighter, smaller, more fuel-efficient cars. And Detroit just isn't producing them. For the Toyota that's country-top and city-smart through stop-and and go, you'd be asking for Toyota 4Runner. And Japan has stepped in and is suddenly flooding the United States with fuel efficient cars. Americans are buying them up and they're landing in driveways all across the United States. Honda enjoys the highest owner loyalty among all leading import cars. And you can't put a price on loyalty. And Reagan's under pressure from the auto industry to give them some breathing room. So that prompted Reagan to jawbone the

Japanese and to threaten tariffs that ultimately landed on some other products as well. But the concentration on cars resulted in Japan to voluntarily restrain their own exports, to limit the number of cars. Voluntarily. Voluntarily, yeah. So how was it in this case that we avoided a big trade war with Japan? Why did Japan basically agree to do what Reagan asked? Well, in this case, both sides had a lot of interest in avoiding a trade war. The U.S. has got military bases in Japan, is pledged to defend Japan in event of attack. And there's just no scenario where Japan's going to have sustained hostilities with the

United States. And for Reagan, I mean, Reagan fancies himself a free trader. He doesn't want to have a trade war. He doesn't want to have a breach with the World Trade Organization. He doesn't want to be seen as unilaterally disrespecting the rules of global trade. So both sides find this finesse. So-called protectionism is almost always self-destructive, doing more harm than good, even to those it's supposed to be helping. Advocates of a protectionism often ignore its huge hidden costs that far outweigh any temporary benefits. So this is an example of these global trade rules and global trade

institutions working. This is an example of, yes, the rules-based global trading system working, and also the pragmatic interests of business and consumers, which generally carry the day over the kind of screaming of protectionists. The European Union has not treated us well. And it's been a very, very unfair trade situation. I'm here to protect. And one of the reasons I was elected is I'm protecting our workers. I'm protecting our companies. And I'm not going to let that happen.

is I'm protecting our workers, I'm protecting our companies, and I'm not going to let that happen. Trump's trade advisors will often point to the 1980s example with Japan and cite it as evidence that if you stake out a tough position, if you sell people on the idea that you're willing to go to war, then that can be a fruitful prelude to negotiations that get you what you want. But the situation today is quite different from the situation in the 1980s. We'll be right back. So, Peter, from everything you've said, tariffs should be imposed carefully to solve a problem because of their power to trigger trade war. So what problem are the tariffs that Trump is proposing on steel and aluminum supposed to address? Well, Trump is rhetorically going after something that is in fact a problem in the global economy. There's way too much steel being produced.

We've got governments around the world subsidizing steel production. There is a large glut of steel on world markets, and a lot of it's coming out of China. The U.S. and the European Union claim China has been dumping steel products onto the global market, which has hurt their own steel makers. Ohio steel makers continue to fight a losing battle against cheap foreign steel. China, the global steel making giant, makes more steel than all other countries combined and sells it for less than it costs plants here to make. The issue here is that these tariffs that the Trump administration has outlined would hit not China, which sells only about 2% of the steel to the United States that's consumed in the United States, but every other American trading partner that sells steel. American trading partner that sells steel. Canada, which is the number one supplier,

South Korea, Japan, Taiwan, Germany, Mexico. These are countries that view themselves as key American allies that are committed to the rules-based global trading system that are suddenly being hit by the impacts of these tariffs. So the math that you've just laid out is pretty remarkable. President Trump says that these tariffs are about cheap Chinese steel, but we only get about 2% of our steel from China. So actually, these tariffs are mostly hitting the other countries that we get our steel from, including many of our allies. But does this at least solve a problem for U.S. manufacturers? I mean, the idea is that you help American steel producers who are operating in a global climate where there's all this surplus Chinese steel that's bringing down prices and making it very difficult for them to be profitable. And certainly the steel industry's lost a lot of

workers. There are a lot of laid off steel workers in the industrial Midwest. And the steel producers themselves are happy about these tariffs. The problem is that in the American economy, there's something like 80 times as many people who wake up and go to work at companies that buy steel as there are workers who go to places that make steel. So when you help the steel companies shore up their profits by protecting them from overseas competition, you've hurt everybody who depends upon buying steel. I mean, the automakers have to pay if these tariffs happen. The companies that make farm equipment, construction equipment, some of these are really big companies like Caterpillar that are selling their

wares around the world. They're going to have to pay more for steel. So there would actually be potentially more American workers negatively affected by these tariffs than helped by them. Because more people, it sounds like working companies that use steel, that would be more expensive as a result of this than people who would benefit because they work in domestic steel production. This is precisely why much of the American business world is up in arms about these tariffs. Well, our biggest complaint really is that tariffs are taxes. For the beer industry, potentially $347 million a year in taxes. I'm very concerned. There's significant risk here. These tariffs will raise prices on American consumers of cars and trucks that are

actually built in America. And it's not just increased prices and disruption to the supply chain, but the fear of retaliation that's already been stated by foreign leaders around the globe. This is, in fact, the mainstream view among economists and businesses, that you're helping one industry at the expense of everyone who depends upon buying the goods that that industry produces. This is why Gary Cohn, the president's chief economic advisor, walked out the door, having failed to carry the day with this argument, that the economy would be hurt by these tariffs. So then what exactly is the president's justification for doing this?

The justification for these tariffs from the Trump administration. I mean, we need it for defense. We need great steel makers. Is that imports of steel and aluminum constitute a national security threat to the United States. So the idea that Americans are not as safe as they would be because we're buying steel and aluminum from Canada. So is the president saying, Peter, that in the event of war, we would need plenty of steel, plenty of aluminum, presumably for weapons, for ships, for planes. And we need to make sure to protect our own domestic manufacturing of those materials instead of relying on another country for those metals. Is that basically the argument? Yes. Implicit is this idea that there's something

sacred about steel and aluminum. And if we're not in control of it, if we don't have our own supply of it at home, then we're in peril. But let's remember that something like two-thirds of the steel that we are consuming in the United States is produced in the United States. If the U.S. generates two-thirds of the steel that we consume, how could there be a national security threat of us suddenly not being able to produce enough of our own steel? Well, if Mr. Trump goes through with this plan, that's a question that some judges in Geneva at the World Trade Organization will probably be wrestling with. So this could actually end up in that global rule system that you've been describing. Well, we have issued a statement in response to the announcement by President Donald Trump. I mean, the European Union has signaled that it's likely to challenge these tariffs as illegal under WTO.

We stand ready to respond swiftly, firmly, and in a proportionate manner on the basis and as required by WTO rules. proportionate manner on the basis and as required by WTO rules. Now, that presents something of an existential crisis to the World Trade Organization because built into the World Trade Organization is a lot of deference to sovereign nations. And they may be tempted to say, we may or may not agree with this rationale, but the United States as a sovereign nation has the right to determine for itself when its national security is on the line. If they rule that way, the result of that will be to blow a giant hole in the rules-based global trading system because that would presumably open the floodgates to lots of other assertions from other countries that are looking for an opportunity to protect favored industries. On the other hand, if they invalidate these Trump tariffs, if they say, no, we're not buying it, there is no real

national security claim here, that could prompt the Trump administration, which has been openly hostile to the World Trade Organization, to either just disregard the referee and let the game go on, in which case they will have undermined the power of the World Trade Organization, or to just pull out altogether. Then we'd be in uncharted territory. So you're saying that this proposal by President Trump has the potential to really throw the global trading system into crisis? Correct. So how have other countries responded to the threat of these tariffs on aluminum and steel? There is a provisional list being discussed. It will now be shared with member states. I mean, the European Union has already signaled that if these tariffs happen,

they're going to put retaliatory tariffs on a bunch of sensitive American products. I would say that on the list, there are steel products, there are industrial products, and there are agricultural products. And certain types of bourbon is indeed on the list. Bourbon, which is produced overwhelmingly in Kentucky, where Senate President Mitch McConnell hangs his hat. Harley Davidson motorcycles, which come from the state of Wisconsin, home of House Speaker Paul Ryan, and other sensitive products.

Donald Trump's decision to impose tariffs on steel and aluminum imports has fueled fears of an escalating trade war. Canada, Mexico, China, Australia, Brazil, and the European Union are all threatening retaliatory measures against U.S. products. are all threatening retaliatory measures against U.S. products. So we regard the imposition of any new tariffs or any tariffs on steel or aluminum between our two countries as absolutely unacceptable. The EU will react firmly and commensurately to defend our interests. We're no longer talking about individual industries. We're no longer talking about individual industries. We're no longer talking about protecting strategic industries. We're talking about using trade to inflict harm across borders.

So if these tariffs that the president is threatening on aluminum and steel, if they don't really address a national security threat. And if they wouldn't actually do all that much to change the global trading math around steel and aluminum, and if it's really just going to end up upsetting our allies and provoking all this retaliation, is there some other reason why President Trump is doing this? We are going to put American steel and aluminum back into the backbone of our country.

These tariffs fulfill a very prominent campaign pledge that this president ran on. We're going to put the miners and the steel workers back to work. And allow him to go and be greeted warmly by steel workers. I mean, in places like Indiana, Illinois. And one of the hardest hit has been the state of Ohio. Manufacturing jobs, your steel jobs. Ohio, Michigan, Pennsylvania.

And when I'm president, guess what? Steel is coming back to Pittsburgh. And a lot of other things are coming back. Where steel workers have seen really, really awful unemployment, have lost homes, have lost savings. I mean, this is a way of saying, I feel your pain. Folks, I'm going to do so much about it. It's going to be so easy. And I've done something about it.

And you talk to trade experts, and they see it as a sort of cynical ploy where you're effectively damaging the economic interests of more working people in exchange for that photo op. But the power of that photo op is an opportunity for this president, who is very good at speaking directly to his base, to wave a victory flag while a bunch of nerdy economists run around screaming, actually, it's a lot more complicated than that. And it seems to be a bet that those people will be drowned out by the sheer power of that imagery of steel mills hiring people. So this is about domestic politics, but it sounds like there are very real and potentially very destructive consequences of these tariffs to the American economy, to American workers, and to our relationships with countries around the world. Yeah, that's exactly right.

Peter, the president is invoking national security, as we've discussed, in trying to justify these tariffs. But do you think these tariffs actually threaten national security? I mean, if you believe that it's important for the United States to have the trust of its allies, then there is an argument to be made that this jeopardizes national security. as national security. I mean, look, out of the carnage of the Second World War came this idea that if our commercial interests are linked, if we're trading with one another, then we're less likely to take up arms against one another and go to war. And the United States, the largest economy on earth, is now run by a president who does not seem to believe in that basic idea. That is a direct challenge to the collectivist notion that has driven not only trade policy, but diplomacy in the post-World War II era.

And it's coming in for a stiff test. And one could argue that that is a threat to American national security. Peter, thank you very much. Thank you very much, Michael. On Wednesday, the European Union announced the tariffs it plans to place on American-made products in retaliation for the U.S. tariffs, including bed linens, chewing tobacco, cranberries, and orange juice. Despite those threats, the Times reports that President Trump is expected to sign the tariffs later today. is expected to sign the tariffs later today. Here's what else you need to know today.

The Times reports that President Trump has attempted to speak with the witnesses in the special counsel's Russia investigation about what they told investigators. In one case, Trump asked his former chief of staff, Reince Priebus, what he said to the investigators. In one case, Trump asked his former chief of staff, Reince Priebus, what he said to the investigators. In another case, the president asked a White House lawyer, Don McGahn, to publicly deny a report in The Times that McGahn had told investigators that Trump asked him to fire the special counsel. McGahn never issued such a denial. The encounters could open a new line of inquiry for the special counsel about whether the president sought to tamper with witness testimony. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.