Is a Trade War on the Horizon?
The White House just declared its long-awaited opening salvo on its trade policy. Using the Trade Expansion Act of 1962 section 232 authority, President Trump announced his intention to impose tariffs on aluminum and steel imports of 10% and 25%, respectively. Interestingly, this 1962 Act allows trade restrictions in times of war and for national security reasons. In February, the Commerce Department released a report concluding that steel and aluminum imports impair national security. On Thursday, President Trump laid out a timeline for the rollout and implementation of the tariffs. The order is set to take effect in 15 days.
The U.S. imports the majority of its aluminum from Canada.* Steel imports are more dispersed, with the top three importers being Canada, Brazil and South Korea, representing 78% of U.S. steel imports (China is the 11th largest). It is important to note that about 70% of the steel consumed by the U.S. in 2016 was produced in the U.S. We also exported about 11% of what was produced. For aluminum, however, the U.S. imports approximately 90% of what it consumes.
The announcement of the upcoming tariffs did not exclude certain products or countries that are North Atlantic Treaty Organization (NATO) members, such as Canada and Germany, or other traditional allies such as Japan and South Korea. At first, members of the Trump administration indicated there would be no country exclusions to the tariffs, though on Thursday, President Trump said he would stay flexible on adjusting metals tariffs on a “country by country basis.” Canada and Mexico will be exempt from new tariffs at least at the outset as the North American Free Trade Agreement (NAFTA) is renegotiated.
What Was the Initial Global Reaction to the Tariffs?
Initially, the domestic market seemed to take the trade news in stride (the S&P 500 was positive for the day last Thursday), but stocks fell in the following days. Non-U.S. markets were generally negative after the announcement.
When President Trump announced the tariffs, there was pushback from international organizations. Early indications from Jean-Claude Juncker, head of the European Commission, suggested the EU could retaliate by targeting U.S. products in return. The head of the World Trade Organizations suggested that trade wars were in no one’s best interest.
Some US lawmakers had pressed President Trump earlier in the week to reduce the scope of the proposed tariffs. Early this week, for example, House Speaker Paul Ryan talked to President Trump about scaling back his tariff proposal to something more targeted. Around 100 Republican members of the House of Representatives sent President Trump a letter Wednesday urging him to rethink the tariff proposal.
It is early in the process to understand the longer-term implications of the recent news. While near-term implications on consumer prices is small, the longer-term impact on global trade, and ultimately companies and markets, is the focus of debate in the future. While Canada and Mexico are said to be initially exempt, the proposed tariffs may still complicate any renegotiation proceedings.
For the moment, we are likely to see continuing market volatility as the yin and yang of tweets hurtled through cyberspace impact the psychology of the markets. Already in 2018, the VIX has had bigger swings than it did during all of 2017. Hang on for the ride.
*Global Steel Trade Monitor, December 2017.
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