US President Donald Trump’s decision to impose tariffs on US imports of steel and aluminium surprised markets, raising the fear of a trade war. While Trump tweeted “trade wars are good, and easy to win,” this is wishful thinking. History shows trade wars end up having a negative impact on all protagonists.
Under Trump’s plans, the US will place an additional 25% global tariff on imported steel and a further 10% tariff on aluminium. The US is the world’s largest importer of steel, importing over 35m metric tons in 2017, for use in a wide variety of industries – including construction, automobiles, white goods, packaging and general manufacturing.
It is also a large consumer of aluminium, importing more than 5.7m metric tons during the first ten months of 2017 – largely for use in the aerospace, defence, automobile, electrical wiring and food packaging sectors. The consequences of these tariffs will therefore be significant.
Ignoring the lessons of history
A review of past US tariff decisions does not paint an encouraging picture. In a similar move, US President George W Bush imposed tariffs on steel imports in 2002 to protect the domestic US steel industry. Subsequent reports found the majority of firms surveyed reported “substantial increases” in the price of steel and estimated 200,000 US jobs were lost as a result. President George W. Bush reversed the tariffs in 2003.
In 2009, President Obama imposed tariffs on Chinese manufactured tyres. A subsequent report by the Peterson Institute found Obama’s tariffs helped grow employment in the US tyre industry by 1,200 jobs. However, this came at the cost of an estimated 3,700 jobs lost in the retail sector. The cost to US consumers was estimated at US$1.1bn, as tyre prices rose sharply following the imposition of tariffs.
Taxing its own consumers
Trump needs to understand trade is not a zero-sum game; it is a net contributor to productivity and economic growth. It is more efficient and cost effective for the US to import aluminium from its Canadian neighbour than producing the metal at higher cost domestically.
While domestic US steel mills stand to benefit from the proposed tariffs, which are likely to drive an increase in local demand, it unlikely these mills will be able to respond fast enough, as they do not have sufficient spare capacity to meet the incremental demand. Therefore, the import tariffs are likely to create an imbalance of supply and demand, driving domestic steel prices higher and acting as a drag on profitability in the manufacturing sector. This will cause these companies to raise prices. As a result, Trump’s proposed tariffs effectively amount to a tax on the US consumer.
While those working in the steel industry should benefit from greater job security and a potential uplift in remuneration, rising margin pressure in the manufacturing sector will likely have a negative impact on the employment prospects of those in this space.
The impact of Trump’s tariffs could have far-reaching consequences for the US and global economy. The EU has already touted placing an import tariff on several American icons including jeans, bourbon and Harley Davidson motorcycles. European Commission President Jean-Claude Juncker warned the EU would ‘not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk’.
Unless Trump decides to reverse his decision, we expect consensus to downgrade growth estimates for the US economy. The rise in prices will also act to raise inflation forecasts, making it more likely the Federal Reserve will increase rates at a faster pace than the market currently anticipates. While neither revision is likely to change the fundamental outlook for the US and global economies, we expect these negative incremental revisions to weigh on market sentiment.
Robert Lea is head of global equity research at Ashburton Investments