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Thoughts on Trump’s Steel & Aluminum Tariffs

Last week, President Trump announced steel and aluminum import tariffs (of 25% and 10% respectively) on “national security” grounds (Section 232 of the Trade Expansion Act). He signed the orders to impose the tariffs today, with some amendments from his previous hard line position.

The announcement follows tariffs on solar panels and washing machines earlier this year, and is in line with his campaign promises to protect jobs in America. Internationally, the proposal was met with concern and anger, especially from US allies, for whom the national security premise does not make sense. The European Union promised retaliatory tariffs, Great Britain expressed deep concerns and Canada lobbied for exemption. Curiously, non-allies like China and India were relatively quiet. Trump has gone on to clarify his position:

We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed. Also, Canada must treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying.

After a week of fervent lobbying, Trump softened his stance and exempted Canada and Mexico from the previously sweeping tariffs. There are 15 days before the tariffs go into effect, in which the other allies will attempt to negotiate with Robert Lighthizer for similar exemptions.

Looking forward to 3:30 P.M. meeting today at the White House. We have to protect & build our Steel and Aluminum Industries while at the same time showing great flexibility and cooperation toward those that are real friends and treat us fairly on both trade and the military.

The markets responded with volatility — S&P fell with Trump’s string of announcements, recovered with Ray Dalio’s comments (the trade war is a political show), and fell again with the resignation of Gary Cohn, the pro-market ex-banker who was Trump’s Chief Economic Advisor. ArcelorMittal and Nippon Steel & Sumitomo Metal, the largest publicly traded steelmakers also saw their shares fall significantly over the past few days. In the United States, the shares of US steel producers (US Steel and Nucor) rose, and US defense contractors (Lockheed Martin, Boeing, Raytheon, Northrop Gruman) saw their shares fall.

How do the Tariffs affect the US?

The intended, primary effect of the tariffs would be to raise foreign steel and aluminum prices thus making US steel and aluminum producers more competitive. As steel is somewhat commoditized, steel-consuming companies will be more likely to choose domestic suppliers — meaning more jobs for US steel workers. However, higher steel prices also means higher input costs for steel-consuming industries (railroads, car manufacturers, defense contractors). The higher cost structure will result in less competitive products and eventually stagnation of wages or even layoffs. The net result on jobs is difficult to estimate, but the prevailing belief among economists is that the loss in steel-consuming jobs will be higher than the gains in steel-making jobs. There is precedence — when the George W. Bush administration put up steel tariffs (15% to 30%, excluded selective US allies) in 2002, net loss of jobs were estimated to be 200,000 (according to this report).

Then there are the retaliatory tariffs, which so far appear to be contained to relatively niche products — Harley Davidsons, Levi’s jeans, and Kentucky whiskey. President Trump welcomed retaliation, asserting that “trade wars are good, and easy to win”. This may be true — if the retaliatory tariffs did escalate into a trade war, President Trump may be able to outlast his counterparts in the EU, Great Britain and Canada. Trump has shown a history of resilience, both in his business life and his political life. Trade wars could also provide a us versus them narrative, and distract the American public from the Russian collusion probe plaguing Trump and his allies.

Which Foreign Countries are the Most Affected by the Tariffs?

The United States is the world’s largest steel importer, and has sustained a trade deficit in steel for over a decade. a 25% tariff would significantly impact both the countries that export to the US and the steel makers. According to a report by the International Trade Administration, the top importers by volume are Canada, Brazil, South Korea, Mexico and Russia. Out of those countries, Canada and Mexico are especially reliant on the US, with the share of its steel exports to US higher than 70% of its over steel exports. China was ranked 10th by volume in 2017, and continues to trend down as the economy diversifies away from manufacturing.

Effect on China

As the world’s largest steel exporter, China is surprisingly insulated from the tariffs. For most of the past decade, China has sustained a significant trade surplus of steel. All of the top 10 destinations of Chinese steel are countries in Asia and Middle East (South Korea is the largest importer of Chinese steel in 2016). In 2016, the United States comprises of a measly 0.8% of China’s steel exports, down from 1.9% in 2015. Any impact on China’s steel exports will be marginal, thus China’s unconfrontational stance on the tariffs is to be expected. In fact, the ensuing trade war between US and its allies will benefit China, both politically and economically.

Effect on Canada

Canada is a relatively small steel exporter, ranking 18th in the world. However, Canada is disproportionately reliant on the US, with the US accounting for 88% of exports. Justin Trudeau has said that the tariffs were “unacceptable” and Christya Freeland promised “appropriate measures to defend workers”. This is happening alongside NAFTA re-negotiations, where the Canadian dairy and softwood lumber industries were targeted. The negative effects of US protectionism have prompted a sell-off in the Canadian Dollar, which fell to its lowest in 2018 this week. However, with the exemption Canada may be favorably positioned for foreign steelmakers looking to escape the tariffs.

Which Companies are the Most Affected by the Tariffs?

Any foreign steelmakers that rely on the US for export will be hurt by the tariffs. This includes the aforementioned ArcelorMittal (Luxembourg) and Nippon Steel & Sumitomo Metal (Japan), as well as POSCO (Korea), JFE (Japan), Tata Steel (India), Hyundai Steel (Korea), and China Steel (Taiwan). Foreign aluminum producers such as Rio Tinto Alcan (Canada) and UC Rusal (Russia) also suffered in the equity markets, although Rio Tinto Alcan share should recover with the news of the exemption. Conversely, all the US steelmakers and aluminum producers (US Steel, Nucor, Alcoa) will benefit. Some of the losses and gains may be reversed by retaliatory steel and aluminum tariffs, or by further amendments to the tariffs.

Final Comments

There are 2 weeks before the controversial tariffs take effect, in which anything could happen. Whether this was a power move to bend trade partners to his will, or a bonafide effort to boost US jobs remains to be seen.

Data Source: International Trade Administration

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