The Potential Impacts of Trump's Steel & Aluminum Tariffs

President Donald Trump announced yesterday, March 1st, that he plans to impose 25% tariffs on imports of steel and 10% on aluminum. Global markets reacted strongly, with the U.S. Dollar, Dow Jones, and low quality Corporate Bonds suffering the most. The Trump tariffs are expected to have a large impact on the economy, with the prospect of retaliations broad in scope and difficult to quantify at this time.

Even as the Administration rebuffed the notion that there will be retaliatory acts against the US, the European Union promised them this morning.  National Trade Council Director Peter Navarro told Fox Business this morning that:

I don’t believe any country in the world is going to retaliate because they know we are the biggest and most lucrative market in the world and they know they are cheating us and all we’re doing is standing up for ourselves. 1

Within the hour, the administration was proven wrong on trade retaliations as EU Commission President Jean Paul Juncker vowed that Europe will respond in kind. 2 

While this is a rapidly developing situation, with new barbs flying across the diplomatic field by the minute, we want to focus on what we know impacts are likely to look like even without tariffs against American companies and products.

One of the greatest fears on Wall St. surrounding the Trump tariff announcement was the prospect of trade war. The definition of trade war is “a situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions.” In short, trade wars aim to both bolster domestic industries and to weaken foreign countries’ ability to compete.

Donald Trump took to Twitter this morning to clarify the administration’s position on trade war:

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy! 3

The history of trade wars in America does not support the claim that they are “easy to win.” The Smoot-Hawley tariff- which kicked off a global tit-for-tat tariff war-  resulted in a 66% decline in global trade between 1930 and 1934. 4 There is a clear consensus among economists that the Smoot-Hawley bill exacerbated the Great Depression. 5

Given the shift toward domestic consumption of imported goods in the American economy since the 1960’s, a trade war on the order of the 1930’s could have much deeper impacts on the broader American economy. Inflation, a slowdown in construction as Americans move in greater numbers to cities, and the much reported need for infrastructure building are all at high risk for unpredictable repercussions.

Immediate global reactions to the Trump tariff were somewhat muted compared to what one might expect, largely due to the fact that the United States has an expansive network of alliances and trade treaties. Those allies initially hoped that they would be exempt from the impact of the tariffs- arguably, some of them stood to gain from the situation if they were. They would be potentially be able to grab up market share of exports to the U.S. at a better price for their bottom lines. Australia, Japan, South Korea, and Canada all hoped they would be exempt as of last night. 6

Despite the unusual practice of waging a unilateral trade war against one’s spectrum of allies, U.S. Commerce Secretary Wilbur Ross told the press this morning that Trump will make no exemptions.

Of the options that I presented, the president chose one — which was put broad tariffs on all products from all countries. Wilbur Ross, 7

 

Getting into the hard numbers, let’s take a look at whom the Trump tariffs will impact most. For starters, aluminum and steel imports themselves account for roughly 2% of total U.S. imports according to Barclays’ research. 8 The U.S. imports four times as much steel as it exports presently.

Despite the fact that the tariffs appear to many across the spectrum of the financial press to be aimed at China, the top steel exporter to the U.S. in 2017 was Canada. 9 Brazil, South Korea, Mexico and Russia were also major exporters, with Turkey, Japan, Taiwan, Germany, and India rounding out the minor end of the top exporters. These top 10 exporters together made up 78% of all U.S. steel imports. The rest of the world accounted for 22%. China was not in that top 10 group.

China did make the top 4 exporters to the US for aluminum, behind Canada, Russia, and the United Arab Emirates. Canada’s hopes for exemptions and particular ire toward the Trump administration make sense in this context, as they will be by far the heaviest impacted trade partner in terms of the smaller aluminum tariff. Notably, neither China nor Russia voiced an expectation of exemptions in response to Trump’s announcement.

While it’s difficult to quantify the slippery slope of tariffs and trade wars in the modern economies of the developed world, it’s clear that even limited to the promised Trump tariffs, they will make a heavy impact domestically. Everything from beer and soda to airplanes and cars will be impacted, as input costs jump for producers and those costs are passed on to consumers. Inflation is likely to rise, and it’s uncertain if there will be a net loss or net gain in American jobs given the modern process of steel production. If indeed there are retaliatory tariffs against American firms, it’s impossible to quantify the potential damages to the U.S. economy.