The EU does not want the president’s tariffs to create a spiral of retaliation. But Europe is a target – and a battle looks inevitable

Blast furnace B will fire up this summer in Granite City, Illinois, giving up to 500 steel workers a job and offering President Donald Trump a fitting emblem for his campaign to put America first. Mothballed for several years by US Steel, the blast furnace sits next to the Missouri river, north of St Louis, where it will smelt iron made newly competitive by Trump’s decision to slap a 25% tariff on steel imports and 10% on aluminium, including from the UK and Europe.

Within hours of Trump first propounding his protectionist move in a tweet, the European commission hit back with the threat of its own measures: extra tariffs on everything from orange juice to Harley-Davidson motorbikes.

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Cecilia Malmström, the EU’s trade commissioner, said she wanted to avoid a tit-for-tat battle that could turn into a full-blown trade war. “A trade war has no winners. If it does not happen, all the better – then we can work with our American friends and other allies on the core issue of this problem: overcapacity,” she said.

When he signed the presidential order on Thursday, Trump made it clear Mexico and Canada would be excluded from the plan and suggested Australia and “other countries” might also be spared. However, a trade war now looks inevitable because Europe appeared to remain firmly in his sights when he added that any retaliation by the EU would be met with a tariff on European car imports.

“We’re going to be very fair, we’re going to be very flexible but we’re going to protect the American worker as I said I would do in my campaign,” said the president. “A strong steel and aluminium industry are vital to our national security,” he added. “Steel is steel. If you don’t have steel you don’t have a country.”

Raoul Leering, head of international trade research at ING, said: “This is a very dangerous development, even though the damage in the short term from steel and aluminium tariffs is limited. We have a president that doesn’t subscribe to the benefits of trade. So if Europe or China retaliates, provoking Trump to further action, the tit-for-tat escalation of protectionist measures would be very damaging.”

US presidents have adopted trade tariffs before in their frustration at what they see as “dumping” by state-subsidised foreign competition. In 2002 George W Bush said he would impose 30% tariffs on steel products, using the pretext, like Trump, that the US’s national security was threatened by the decline of its steel industry.

Facebook Twitter Pinterest Steel coils in the rail yard next to the Granite City steelworks, which is to reopen one of its dormant blast furnaces this summer. Photograph: Bloomberg via Getty Images

European leaders appealed to the World Trade Organisation, which arbitrates in trade disputes, and won. Bush went ahead anyway, provoking Brussels to select a string of tariffs on goods made in Congressional swing seats. It was said at the time that the threat of an import tax on Florida oranges brought the state’s governor, Jeb Bush, into conflict with his brother, the president. Within weeks, the tariffs were abandoned.

“But the world knew that Bush believed in trade as a route to growth. That’s not the case with Trump,” said Leering.

There are Democrats and a smattering of Republicans that support the move, citing the subsidies provided to steelmakers Gerdau and CSN in Brazil, which can provide lower-cost alternatives to US steel because the government’s development bank, BNDES, provides them with below-market-rate loans.

Brazil, unlike China, is a big exporter to the US and is accused of costing America thousands of steel jobs. Canada and Brazil account for around a third of US steel imports. China accounts for 3%. The UK accounts for only a small proportion of the EU’s exports, though this still means 25m tonnes of steel, worth £360m, need to find another home.

Yet a booming US economy hardly needs the extra steel jobs. Over the last year, the US labour market has added jobs at an electric pace and wages have started to rise after decades of stagnation. With this in mind, the US central bank, the Federal Reserve, is expected to add another percentage point to interest rates this year.

So the 500 jobs at US Steel and those at other American plants that will benefit from higher-cost imports are not about economics. They are a political gesture.

If the impact on the employment figures of effectively raising the cost of steel was uppermost in Trump’s mind, analysts say he would have considered the potential net loss of jobs in the car industry, the aviation industry and the countless other manufacturers that depend on cheap steel as a raw material. These companies are expected to pass on the extra cost to their customers and suffer the usual consequences – lower demand and a profit squeeze.

“There is a cost to the domestic economy from protectionist measures,” says Ben May, head of global research at consultancy Oxford Economics. “A tariff that pushes up the price of imported steel in the US will have a negative impact on carmakers and every industry that uses steel. In the rest of the world, it will create oversupply and reduce the cost.”

Most analysts argue that Trump is ignoring economic realities to make gestures to his voter base of blue-collar, disenfranchised workers before midterm elections in November.

Trump’s economic adviser Gary Cohn resigned after failing to persuade the president to drop his plan. Republican leaders, many on the libertarian and free-market wing of the party, have picked up the baton to argue that tariffs are a crude tool that will backfire on US businesses. Vice-president Mike Pence and Treasury secretary Steve Mnuchin are known to have voiced misgivings in private.

However, Trump has pressed ahead with the support of prominent Democrat senators, steel union representatives, commerce secretary Wilbur Ross, and two advisers: economist Peter Navarro and trade representative Robert Lighthizer.

Ross said last year that before he conducted trade talks with Britain it would need to scrap EU food regulations and fall into line with US rules that allow chlorinated chicken.

Lighthizer and Navarro have persuaded Trump that China poses an existential threat to the American economy and that the US is the victim of unfair free trade agreements, including the North American Free Trade Agreement (Nafta).

Facebook Twitter Pinterest Donald Trump with Harley-Davidsons outside the White House, after a visit from the motorcycle manufacturer’s senior management. Photograph: Carlos Barria/Reuters

Both argue that US firms would thrive behind a protective wall of high tariffs. Lighthizer is running the trade talks with Mexico and Canada to revise Nafta in the US’s favour. It appears that Mexico and Canada were only excluded at Lighthizer’s request to keep them as bargaining chips in the Nafta talks, which completed their seventh round last week.

Navarro believes that closing the US trade deficit by restricting imports will help the economy grow. His critics point out that lower imports make no difference to GDP, which measures the production of US goods and services. By contrast, a rise in exports propels GDP higher.

Mainstream economists and much of the Republican party subscribe to the idea that openness to trade makes US companies more efficient and when they cannot compete, they should shift their efforts to making something with a comparative advantage. That said, figures from credit insurer Euler Hermes shows 467 new protectionist measures were implemented worldwide in 2017, led by the US with 90 new measures that included import duties on foreign-made solar panels and washing machines.

The UK is one of the top 10 economies for those introducing protectionist measures over the past four years – though this mostly involves subsidising UK businesses rather than punishing foreign rivals, as Trump seeks to do.

Germany and Switzerland are ranked fourth and sixth worldwide for the same reason – using trade finance and other subsidies to promote domestic firms against rivals.

Those figures suggest that Trump’s claim of state-subsidised foreign firms abusing free trade has some validity. The WTO should be the forum to settle these disputes, but Trump thinks the WTO is rigged against the US.

When it rules his tariffs are illegal under WTO rules – as it surely will – the president will say that justifies his view. And then the trade war will escalate.