AFTER weeks of speculation, it became official – US President Donald Trump has signed an order to slap a 25% tariff on global steel imports and 10% on aluminium, acting on the Commerce Department’s recent recommendation.
On Thursday, defying opposition from his own party, Trump put his signature on paper imposing stiff and sweeping new tariffs on imported steel and aluminium. However he softened the impact by agreeing to exempt for now, Canada and Mexico.
Well, steelmakers are delighted.
Companies that use steel however, like automakers, aren’t so happy about the prospect of higher costs. More broadly, market watchers are now concerned that this could be the catalyst for global trade wars, especially with US trading partners already threatening retaliation.
Since the announcement was made last week, financial markets across the globe sank on fears of retaliatory action.
It was made worse when Gary Cohn, the head of President Donald Trump’s National Economic Council, resigned late Tuesday.
Wall Street has viewed Cohn, a former Goldman Sachs executive, as level headed and was regarded as the chief architect of business-friendly corporate tax cuts signed into law last year. Cohn is against the tariffs.
On Wednesday, the Dow Jones Average fell about 350 points at its low on Cohn’s resignation.
This sort of reaction isn’t surprising, as in the past, protectionism measures have typically caused financial markets to fall.
Should other countries retaliate by imposing tariffs of their own, it will flatten US exports and subsequently lower corporate earnings.
So firstly, how significant are these tariffs, and exactly how much damage will these tariffs cause?
Truth be told, the tariffs now lack details.
On the surface, it looks to hurt manufacturers and increase cost particularly for automakers.
US automakers will be among the most impacted. The sector accounted for 26% of US steel demand in 2017, behind the construction industry’s 40%, according to data provider Statista.
However will it sharply hurt earnings of corporate America and will it really slice off a few billion US dollars from the US’ gross domestic product?
Fisher Investments MarketMinder says recent history and current political considerations suggest it is lower than most seem to think.
Tit-for-tat war has begun...
In retaliation to Trump, the European Union is preparing punitive tariffs on iconic US brands produced in key Republican constituencies, raising political pressure on Trump to ditch his plan for taxing steel imports.
Targeting 2.8 billion euros (US$3.5bil) of US goods, the EU aims to apply a 25% tit-for-tat levy on a range of consumer, agricultural and steel products imported from the US if Trump follows through on his tariff threat, according to a list drawn up by the European Commission and obtained by Bloomberg News.
Historically this has happened before. And the world did not get into an economic funk. The good news is the implementation of those tariffs had been short-lived.
Trump is not the first president to impose steel tariffs.
For instance, the Obama administration slapped tariffs on steel, twice, actually. China hit back at tyre tariffs by imposing tariffs on US autos. It also added levies to polysilicon from the US, a component in solar panels, in response to the solar tariffs. But that was it – no sweeping trade war.
Similarly, President George Bush imposed steel tariffs in 2002.
“Within a month, the EU threatened to retaliate with tariffs on motorcycles, textiles and orange juice. In December 2003, the US lifted the tariffs after the World Trade Organisation ruled them illegal,” said Fisher Marketminder.
Thus, many feel that history suggests that Trump’s successors will seek to revert his policies, particularly if the protectionist policies result in economic losses.
Trump has said he would reconsider the Trans-Pacific Partnership should the US get a better deal, barely a year after he blasted the agreement and abandoned the trade deal.
So the livelihood of these tariffs aren’t a sure bet either.
How big is the impact of steel tariffs?
According to Fisher Investments MarketMinder, based on 2016 data, global steel production totalled 1,629.6 million tonnes.
“The US imported just 30.9 million. So based on some rough back-of-the-envelope maths, the steel tariff hits just 1.9% of global steel production. And that is if no countries are excluded and all steel types are targeted, both things the administration hasn’t specified yet,” said Fisher Investments MarketMinder.
Secondly, while the administration says the tariffs are primarily aimed at China, that nation exported just 108.1 million of the 808.4 million tons it produced. Of those exports, only 2.4 million tonnes went to North American Free Trade Agreemet or Nafta nations (the World Steel Organisation doesn’t provide a detailed country breakdown, so Nafta is the closest proxy for the US).
“It is difficult to envision this causing a hard landing in the world’s second-largest economy, particularly considering the Chinese have been trying to slow output for years, sensing an oversupplied global market.
“As for aluminium, according to the US Census Bureau, the US imported US$16.2bil worth of bauxite and aluminium last year, less than 1% of 2017 GDP,” said Fisher Investments MarketMinder.
What about Asia?
The news gets even better.
While Asia produces more than two-thirds of the world’s steel, it will be minimally affected when compared to the rest of America’s trading partners, according to ratings agency Moody’s.
“In Asia, the direct economic effects at the macro level would be very small as exports of aluminum and steel to the U.S. typically amount to less than 1% of GDP or exports,” Moody’s said in a research note Friday.
It added that the direct impact on steel companies would be manageable for the steel sector and rated steel-makers in Asia, because steel is predominantly traded within the region.
“The direct impact is moderate on Korean steelmakers, too low on all the rest of Asia,” it added.
However, if tariffs were imposed across large sectors of the economy, then pandemonium could occur.
Fisher Investments MarketMinder says trade wars involving sweeping tariffs across large swaths of the global economy can have crippling economic effects. The Tariff Act of 1930 – aka Smoot-Hawley – sparked the last full-blown trade war.
The Act imposed nearly 900 tariffs across most sectors and had a dramatic impact on trade. US imports declined over 40% within two years, major trading partners retaliated and global trade fell 66% (from US$5.3bil in 1929 to US$1.8bil in 1933), likely exacerbating the Great Depression.
Smoot-Hawley had a cocktail of harmful consequences. It upset the operation of the international financial system. This is because free trade and free international capital flows go together.
Countries that borrow abroad must export in order to service their debts. Smoot-Hawley and foreign retaliation made exporting more difficult. Hence the result was widespread defaults on foreign debts, financial distress and the collapse of international capital flows, wrote Barry Eichengreen, professor of economics at the University of California, Berkeley in a 2016 article titled What’s the problem with protectionism.
So in the current context, Fisher Investments MarketMinder belives tariffs targeting one or two industries do not have sufficient scope to have such a deleterious effect.
There are other tariffs
If one recalls, these aren’t the only tariffs the Trump administration has adopted.
Fisher Investments MarketMinder said that last November, it imposed tariffs on Canadian lumber. They also targeted Canadian aerospace imports in October 2017, but they lifted the tariffs in January 2018 once the International Trade Commission decided the imported planes weren’t harming the US.
In January, the US added tariffs on solar panels and washing machines.
Trump has even talked about imposing a “reciprocal tax” where the US would hit countries with tariffs at the same rates they levy on US goods and services, though others in the administration have stated there is no formal proposal for such a tax at this time.
“So far, none of these have invited sweeping blowback, just the tit-for-tat typical of the last 20-plus years. Canadian Prime Minister Justin Trudeau considered banning US coal exports and spoke of targeting certain industries in Oregon, home to Senator Wyden, one of the biggest proponents of lumber tariffs,” said Fisher Investments MarketMinder.
In a similar vein, the EU is reportedly mulling tariffs on Harley-Davidson motorcycles – headquartered in House Speaker Paul Ryan’s home state, Wisconsin. Kentucky bourbon, produced in Senate Majority Leader Mitch McConnell’s home state, is also in their sights.
To put things in perspective, these moves are deemed political, and none of those products are significant economic contributors to the US.