Why is the whole world after the US President for announcing his intention to impose 25 per cent import duty on steel and 10 percent on aluminum? And why did the US have to use the national security clause of the Trade Expansion Act to increase duty? India has increased duty on over 400 products just this budget. It did not need to invoke any national security law. Then what is so different for the US?

The difference lies in the commitments made at the WTO. 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. The basic problem of the US is water shortage!

Water levels

For the US, the water is less than 1 per cent on most items. This means, if the applied duty on a product in the US is 3 per cent, the country can increase it up to 4 per cent. Not any higher. This low water is the suo moto commitment taken by the US at the WTO with the conviction that low import duties are a must for national development.

Not everyone including most of the developing countries agreed with the US on this then. They chose to retain high water for most products so they could raise the applied duty up to the level of bound duty when in need. As a result, if India raises duty on steel from 10 per cent to, say, 20 per cent, it does not violate the WTO law as the bound duty on steel is 40 per cent. If the US does so, it violates the WTO law.

The US is not alone in opting for low water. The EU, Japan, and most other developed countries have also chosen for less than 2 per cent water. Now, since the US has low water, it cannot increase duties. And that is why it has to use the WTO security exception under Article XXI:(b)(iii) for an increase in duty.

But how can import of steel and aluminium be a threat to national security? The US is both an exporter and importer of these items. In 2016, it exported steel and aluminium worth $38.2 billion. The import values were $74.8 billion. No surge in import and the US meets 70 per cent of its requirements from the domestic sources. So there is no threat to national security.

Shut-downs, job losses

Clearly, the decision of choosing a low water policy by the earlier US governments has tied Trump’s hands. His March 3 tweet says it loud: “The United States has an 800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies.”

But Trump’s decision has domestic and trade costs. A 25-per cent duty on steel will increase the domestic steel price by 5 per cent, leading to an increase in the input cost for industries such as car and engineering, further leading to high cost of these products for consumers.

This may create inflationary pressure, leading to high-interest rates and dollar appreciation. Both bad for economy and exports. Many steel and aluminium user industries may not compete at higher costs. They may shut down leading to job losses.

The largest supplier of steel and steel products to the US is China and not Canada or Mexico as widely reported. The US import of steel and steel products in 2016 was $56 billion. Of this, 21.4 per cent came from China, 13.7 per cent from Canada, 9.7 per cent from Mexico, 6.4 per cent from South Korea and 5.6 per cent from Japan.

The US in 2016 imported aluminium of $18.7 billion with Canada as the largest supplier (36.9 per cent). The remaining 16.4 per cent came from China, 7.34 per cent from Russia Federation, 6 per cent from UAE and 4.7 per cent from Mexico. In 2016, India supplied steel worth $1.3 billion and aluminium of value $211 billion to the US.

The affected countries are already talking about taking retaliatory measures. For example, China has started investigations into the billion dollar imports of the grain sorghum from the US. It may also make life difficult for the US firms whose combined sales into China is now $300 billion. And if the tension rises further, China may dump some of the $4 trillion US Treasury bonds it holds, creating mayhem in the US market.

China, South Korea and Japan may also take the US to dispute settlement at the WTO. Canada, which buys more than half of the US steel exports, thinks of taking similar measures.

The US duty on steel and aluminium also mean that the 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.

The frustration of the US president is understandable. But, as his actions are violative of the WTO rules, they will further weaken the multilateral trade architecture. Next few months will tell if Trump’s provocations have a butterfly effect on the world.

The writer is an Indian Trade Service officer. The views are personal

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