Fears of a global trade war between the U.S. and its global trading partners like China abound as the American president announced last week that he will impose new tariffs on imports of steel and aluminium.
The announcement was followed by a sell-off in the global financial markets. Various industries, global businesses and even organizations like the IMF are concerned that the move will eventually lead to higher prices for the U.S., which will percolate down to all sectors and be detrimental to the end consumers.
This article looks at a few key facts associated with the development.
Options Before the President
The Financial Times reports that the proposal to impose new tariffs was based on the recommendation of the commerce department which offered three options: a global tariff, tariffs targeted at China and other key countries mixed with quotas and a universal quota.
China, the world’s largest producer of both steel and aluminum, has long been accused of flooding the global markets with its cheaper exports, thereby posing a big threat to the local U.S. industry.
Trump has apparently opted for the global tariff option, and has proposed a 25 percent tariff on steel and 10 percent tariff on aluminum imports to the U.S. The move is targeted to protect the domestic steel and aluminum industry which is expected to benefit from an increase in production and the utilization of idle capacity which will also help increase employment.
The Chinese Connection
While China has been repeatedly quoted as the leader in dumping low-cost imports to the U.S., the case for steel is different. Canada (16.7 percent), Brazil (13.2), South Korea (9.7), Mexico (9.4), and Russia (8.1) are the top five steel exporters to the U.S. China stands at a distant number 10 in the list with a miniscule 2.9 percent of contribution. (For more, see: Where Does the U.S. Import Steel From?)
Similarly, China ranks number four in the U.S. aluminum imports list, which is lead by Canada and Russia.
Though apparently targeted at China, the tariffs would see other partner nations getting impacted adversely, possibly leading to retaliatory actions from them.
"I think everyone in this room supports you holding China accountable for its overcapacity," said Representative Kevin Brady, a Texas Republican, as reported by CNN. But he said that the kind of tariffs Trump was considering can "do as much damage as good."
U.S. Steel and Aluminum Sector
More than 90 percent of the total 5.5 million tons of aluminum and around one-third of the total 100 million tons of steel used by American businesses is imported each year.
The BBC reports that between 2000 and 2016, U.S. domestic steel production dropped from 112 million tons to 86.5 million tons, while the number of employees working in the sector reduced from 135,000 to 83,600.
However, a much larger number, 6.5 million employees, work for the various producers and manufacturers who use steel as a key ingredient. They include industries associated with construction, transportation, energy, defense and various finished products.
Imports offer a big benefit – one can easily import anything and everything from across the globe that fits the bill, and one can easily switch import partners amid changing requirement. However, a plant that manufactures steel sheets cannot be easily changed to make steel pipes or tubes. Even if the plants can increase capacity and start diversifying the products, the imports will still be needed to fulfill the large demand. The high-cost imports will then lead to more cost to the American consumers.
Any increase in the steel price due to higher tariffs will eventually dent a blow to a variety of industries, and will have a detrimental effect on the economic growth and job prospects. For example, U.S. auto giants like General Motors Co (GM) and Ford Motor Co (F), air plane make Boeing Co (BA), and mining equipment maker Caterpillar Inc (CAT) use steel and aluminum as key ingredients for their products. As their input costs will increase, they will be forced to raise prices leading to declining revenues and profits.
There is widespread concern that this will also negate the positive effects expected from the tax reforms, which were introduced to help the country’s economic growth.
What History Tells Us
Opinions vary on such developments, and limited availability of historical results point to different outcomes.
A report by Trade Partnership Worldwide LLC indicates that when similar steel tariffs were introduced in the year 2002, it resulted in around 200,000 job cuts in the U.S. instead of job creation.
While there seems to be agreement about the president being right in targeting the unfair trade practices of a few foreign countries that are putting the American industries at risk, there is widespread criticism of the blanket tariffs that are imposed.
Even if the number of employees increase, it may not be significant. Rather, the holistic impact is feared to be far worse.
Wider Impact Across Multiple Sectors
According to Reuters, the U.S. construction industry accounted for nearly 40 percent of the steel demand in 2017, followed by 26 percent by the auto industry, and 10 percent by the energy sector.
The reactions over the last two trading sessions indicate that companies across various sectors may face high cost raw materials, which may push up prices for consumers. The ripple effect is expected to result in higher costs of houses, automobiles and even food products, as steel and aluminum are commonly used for making everything from airplanes to cans.
While the broader markets tanked on Thursday after Trump’s announcement, the steel and aluminum stocks emerged winners amid the carnage. (For more, see Top 4 Steel Stocks for 2018.)
Impact on the U.S. Economy
FT quotes calculations by JPMorgan which show that even if the prices shoot up by the amount of tariff, it may result in an addition of “modest 5 basis points of price pressure - which may or may not be passed onto consumer prices.” The $19 trillion U.S. economy is resilient enough to withstand any such impact.
However, if the other trading partners retaliate by imposing similar tariffs on U.S. exports to their countries, or by dragging the U.S. administration to the WTO, it may have a lasting impact. Such untoward developments may result in a widespread trade war, lead to a high-inflation situation in the U.S. impacting growth prospects and even impact policy and decision-making of the administration.