National security is too important to be a pretext for protectionism

President-elect Biden wants to “build back better” as we seek to recover from the economic shock of the past year. That is great. But please, Mr. Biden, be wary of policy calls to reshore, and please don’t abuse the national security card to justify tariffs. More than one president has managed to (mostly) put aside the ever-present anti-trade rhetoric that’s baked into American politics. In 2021, that will mean recognizing that mandating the domestic production of specific goods within a complex global supply network is prohibitively costly and likely to fail.

Especially in a crisis, there is a reflexive instinct to hunker down and guard against foreign threats. In the face of COVID-19 and growing tensions with an ascendant China, there have been calls from Congress to stop relying on foreign suppliers in our medical supply chains.

There are legitimate concerns about what we send or do not send to certain countries for national security reasons, which foreign companies should or should not have access to U.S. investment, and which products should be sanctioned. But for the vast majority of trade, the logistics industry is best suited to manage most risks. 

Despite the stated desire to reshore, there is little evidence that companies have actually done much of it this year in response to the pandemic, or that they were doing so earlier during the trade-restrictive moves by the Trump administration. Observers note that supply chains have largely held up to the pandemic test. This may reflect the efficiency of the logistics industry. Even when the federal government tries to intervene, it often proves difficult, if not embarrassingly and prohibitively costly.

In a recent study, University of Texas at Austin Research Fellow Nitya Pandalai and coauthors looked at the trade-offs between reshoring and nationwide lockdowns across 64 countries. The authors found that moving supply chains back to the homeland inflicted a greater blow to GDP compared to imposing a national lockdown while maintaining open trade. In other words, no matter how stringently you respond to a pandemic, it’s important to keep global value chains open.

The national security card was used to justify President Trump’s metal tariffs. Trump’s trade team thought those tariffs would rebuild the U.S. steel and aluminum industries, which are undergoing restructuring in the face of global competition. These industries also face a global production glut due to state-subsidized production abroad. Multilateral talks have been frustratingly sluggish — the Organization for Economic Co-Operation and Development’s steel committee recently conducted its 88th session with the biggest culprits like China still going strong on state subsidies. So the political desire to act out unilaterally was understandable. 

Understandable but ineffective, that is. In practice, most U.S. metal imports come not from China or other rivals, but from mostly friendly countries, and even from formal defense treaty allies. With two years of data since those tariffs went into effect, we can now see that the economic costs have outweighed the benefits. More American manufacturing jobs have been hurt from these tariffs than have been helped. This makes sense, considering the ratio of employment in aluminum-consuming industries to employment in aluminum production is a whopping 177 to 1.

The tariff exclusion request process was meant to alleviate some of the costs of the tariffs, but two years of this data show how messy it can get when you mix tariffs and national security. In an analysis of the 189,217 tariff exclusion requests filed by U.S. manufacturers as of September, Joe Brunk and I examined the reasons given, as well as how Commerce Department decisions vary across different reasons. Most U.S. manufacturers cite a lack of U.S. domestic production availability, and these have a 62 percent chance of getting approved. But the few that cite national security as the need for tariff exclusion are by far the most successful — a whopping 91 percent for steel and 100 percent for aluminum.

In other words, there’s a national security exemption to a tariff which was supposedly justified by national security concerns. The incoming Biden team should be wary of this idea. The Trump administration, laughably, even toyed for months with slapping national security tariffs on car imports, diluting what should be a matter of sober importance.

“Building back better” will inevitably include national security issues, but as we have seen, abusing the loophole in trade policy with national security pretexts has undermined U.S. credibility and antagonized allies.

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.

Tags China–United States trade war Commercial policy Donald Trump economy Free trade International taxation North American Free Trade Agreement OECD Reshoring Tariff tariffs Trade War Trump tariffs World economy

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