Will U.S. become 'least favored nation'?

WASHINGTON — Protectionist voices in President Donald Trump's inner circle appear to have gained the upper hand.

It's an ominous sign for ongoing talks to modernize the North American and Korea free-trade agreements, with huge negative consequences for globally integrated industries such as autos.

And it underscores the fact that relations between the auto industry and the White House remain a volatile mix, with the sector benefiting from deregulatory and tax-reducing policies but ever at risk of a trade-related kick in the teeth.

Last week in off-the-cuff remarks, the president announced plans to impose tariffs of 25 percent on imported steel and 10 percent on imported aluminum, going beyond the recommendations of his Commerce Department, which had sought to protect domestic producers with lower and more targeted tariffs, on national security grounds.

The move drew praise from some U.S. labor groups but a heavy backlash from the business community, Republican lawmakers and foreign trade partners.

"With one stroke of the pen, much of the promised benefit of tax reform and other administration initiatives aimed at reviving manufacturing and protecting national security could be undercut," John Bozzella, CEO of the Association of Global Automakers, said in a statement.

He pointed to an analysis that showed steel tariffs imposed under President George W. Bush cost 200,000 jobs.

Experts say steel and aluminum users will lose much more than the steel industry will gain. Steel producers directly employ 140,000 people, according to the American Iron and Steel Institute. That compares with more than 322,000 production workers at automakers and 871,000 employed by equipment suppliers, not to mention other steel-and-aluminum intensive industries such as construction, aerospace, machinery and beverages.

"Trade restrictions and higher prices will nullify many of the benefits we have seen from tax reform," said Bozzella, whose association represents foreign-owned automakers and suppliers. "Investments earmarked for new products and plants will instead be funneled to pay for rising steel and aluminum prices used in existing products and facilities."

By imposing tariffs on foreign metals, Trump is going back to the campaign themes of "America First" and pledges to bring back jobs from overseas that made him popular with his base.

The steel and aluminum moves follow on the heels of widely criticized tariffs on washing machines and solar panels, the withdrawal from the 12-nation Trans-Pacific Partnership agreement, tariffs on Canadian softwood lumber and a failed attempt to impose punitive tariffs on Canadian aircraft manufacturer Bombardier.

"This is just looking at the U.S. economy through a rearview mirror, and basically saying, 'We need all those old-school industries so we're going to put them at the top of the queue and ... make everyone else pay the price for that," said Rufus Yerxa, president of the National Foreign Trade Council and a former U.S. trade negotiator. "It doesn't make sense to make your most competitive industries pay the price for your least competitive industries."

Steel companies will benefit from higher profits but likely won't hire more workers or even open another major mill or smelter, he predicted.

Until now, Trump has been thwarted from disrupting trade relationships by administration globalists such as economic adviser Gary Cohn, Treasury Secretary Steven Mnuchin and Secretary of State Rex Tillerson. But departures of some White House staffers have shifted the balance of power among Trump advisers in the West Wing.

By all accounts, U.S. Trade Representative Robert Lighthizer and Commerce Secretary Wilbur Ross, who come from steel backgrounds and have supported protectionism, along with National Trade Council Director Peter Navarro, a trade hawk, have gained power and were the last ones to have the president's ear before he made his surprise announcement.

It should be noted, however, that no official decision has been made. Several times over the past year the president has stunned supporters and opponents alike by stating new policy directions, only to reverse them hours or days later (see also: protection for "Dreamers," banning transgender people from the military, gun control).

That gives the business community time to make a last-ditch effort to change the president's mind.

And since the European Union and other trading partners have indicated they intend to retaliate or challenge the move at the World Trade Organization, industries that will be the target of retaliation, such as bourbon and agriculture, will join steel users in lobbying for restraint, said Joel Trachtman, a professor at the Fletcher School of Law and Diplomacy at Tufts University.

Yerxa said, "If the U.S. can claim that steel is a national security issue, certainly other countries can claim that autos is a national security issue." He noted that U.S. auto plants exported about 2 million vehicles last year.

Steel and aluminum tariffs could also lead to congressional pushback, given the economic threat to state and local economies from higher raw-material prices. Many members of Congress were frustrated by the tariffs on solar panels and washers, and afterward, several of them expressed interest in exploring options to rein in the president's authority to carry out trade policy.

There is also a groundswell of support for the North American Free Trade Agreement on Capitol Hill as members realize how many jobs are tied to trade with Canada and Mexico. The U.S. is also negotiating with Korea to amend a bilateral trade agreement to address the U.S. trade deficit, primarily in autos.

The steel tariffs don't bode well for NAFTA or the Korea agreement because other parties will perceive the U.S. as having taken unilateral action while they try to negotiate in good faith, several trade experts said. Canada, Mexico and Korea are large steel exporters to the U.S.

"We're basically sticking our finger in their eye, so that's going to make them less likely to make painful concessions to us," Yerxa said.

Jerry Dias, head of the Canadian auto union Unifor and a consultant to the Canadian negotiating team, told Reuters last week that the steel announcement had soured the mood and dashed hopes for a breakthrough in NAFTA talks. "It is crystal clear to us that if Canada is not exempted from the U.S. tariffs," he said, "then Canada should walk away from the NAFTA table."

The broader problem, said Yerxa, is that the U.S. is isolating itself, while the European Union, Canada, Japan, Mexico and other nations are cutting trade agreements with one another.

Car companies that want to sell finished vehicles to Europe, for example, might look more favorably on shifting final assembly to Mexico or Japan rather than having to pay the 10 percent tariff on steel imported to the U.S.

"We're going to be on the outside of their tariff walls," Yerxa said. "And pretty soon it is going to be the U.S. that is the least favored nation in these major trade relations. And that is really bad for the auto industry."