The US government has announced tariffs worth 25 per cent on steel imports and 10pc on aluminium imports.
While tariffs are a protectionist measure aimed at assisting an import-competing sector, the use of across-the-board tariffs instead of more targeted interventions is a blunt instrument and risks legal challenges at the World Trade Organisation as well as retaliatory tariffs imposed by US trading partners.
Even without these blowback effects, tariffs in themselves are not expected to benefit the US economy as a whole. Imposing tariffs on imports can increase the domestic price of aluminium and steel in the US, a cost that will be borne by American consumers.
Beyond the initial reaction to the imposition of tariffs, a key question for Pakistani policymakers is whether the country will be impacted by such tariffs
This is not just a hypothesis, but a rudimentary economic theory of trade which has historically been tested by the imposition of major tariffs by the US in the 1930s and more recently, by the first George W. Bush administration.
An increase in prices in the local market will also hurt local producers of goods who use steel and aluminium as inputs – sectors which employ a significantly larger proportion of the US population than the steel and aluminium manufacturing sectors.
Beyond the initial reaction to the imposition of tariffs, a key question for Pakistani policymakers is whether Pakistan will be impacted directly or indirectly by such tariffs?
Pakistan only makes a minor dent in international imports of steel and aluminium. Data compiled by the International Trade Centre indicates that the country’s imports of steel, aluminium and other goods (including cutlery, metallic instruments, and machinery which are produced using steel and aluminium) comprise less than one per cent of total world imports of these goods.
However, back of the envelope calculations using State Bank of Pakistan data suggest that Pakistan’s import of raw steel increased by 46pc between July and December 2017-18 as compared to 2016-17, while the import of raw aluminium increased by 32pc. Pakistan’s exports of these goods on the other hand, are negligible.
The bigger question then is, how much of Pakistan’s import spread will be affected by price changes in these materials?
Raw aluminium and steel comprise approximately five per cent of the country’s total imports. However, add to this capital goods such as machinery made of these materials, as well as road vehicles, ships and aircrafts, and this percentage rises to approximately one-third of Pakistan’s import bill.
To put this in context, mineral oil and petroleum-related imports comprise one-fifth of all imports. Therefore, a change in world prices of aluminium and steel, and goods produced using these materials have the potential of significantly impacting Pakistan’s import bill.
It is important to note that Pakistan imports most of these raw materials and final products from China; however, the US, Germany, UAE and Japan feature as the top five exporters in some or all lists for these products. These countries will be directly affected by US tariffs.
The US import of Chinese steel and aluminium forms only a small fraction of total Chinese exports of these products. Therefore, US tariffs on these goods will have a limited impact on their price in China, and so only a minor impact on Pakistan’s import of these goods from China.
In fact, in the short term and prior to retaliatory action, Chinese exporters and those of other countries might even reduce the price of their product.
This is because the US is a large importer of aluminium and steel, and a reduction of these imports will contribute to a drop in the aggregate, international demand for these goods. This will force foreign manufacturers to reduce their prices to clear the market and sell off their glut production of aluminium and steel.
More worrying is the possibility of a trade war which can cause a domino effect with multiple countries imposing tariffs, leading to overall price increases which China might not be immune to. As with the oil crisis of the first half of this decade, international price fluctuations bring the failure of past policymakers, and the foot-dragging of current ones, into sharper focus.
To stop Pakistan from being at the mercy of the global winds of change, in the long-term it needs to alter its production mix, and graduate to bringing some fragment of capital goods production to the country to ease the strain and volatility of its import bill.
— The writer is a doctoral student of applied economics at Cornell University.
Published in Dawn, The Business and Finance Weekly, April 2nd, 2018