President Donald Trump announced a plan to impose 25 percent tariffs on imported steel and 10 percent on imported aluminum, following earlier trade actions targeting imported washing machines and solar panels. Trump promised to take action on steel and aluminum imports during his campaign, and many investors expected him to take action much earlier in his presidency.
The surprise for many is that tariffs on steel and aluminum will be imposed across-the-board, rather than directly targeting specific countries thought to be “dumping” the metals at below-cost prices.
Trump’s tweet that “trade wars are good, and easy to win” is a sign that investor fears about Trump’s protectionist leanings are becoming a reality. Another worrisome indication is the elevation of trade hawk Peter Navarro, author of the book “Death by China,” to a more influential position in the White House.
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Tariffs on steel and aluminum may cause more harm than good for American workers, the U.S. economy, and global stock markets. Trump’s assertion about trade wars may be factually flawed, as historical experience provides evidence to the contrary. There may be considerable room to improve current trade pacts, particularly in the realm of intellectual property protection; however, the planned tariffs may be the wrong remedy.
Although domestic steel and aluminum producers will benefit from tariffs, users of steel and aluminum will likely pay higher prices. Auto manufacturers, airplane manufacturers, construction companies and defense contractors are among the companies vulnerable to higher input costs. Canned goods manufacturers will also face rising costs. Consumers are likely to pay higher prices as a result, with tariffs in essence serving as a “tax” on consumers.
There may also be unintended consequences from an employment perspective, as steel-using industries employ 6.5 million Americans, while steel makers employ only 140,000. It is also not a certainty that U.S. steel and aluminum companies will boost payrolls as significantly as hoped. Capital substitution, in the form of robots and automation, is a primary explanation why U.S. manufacturing output has grown in the past two decades amidst a dramatic fall in manufacturing employment. The benefits of firming prices and volumes may provide more of a benefit to investors in U.S. steel and aluminum companies than to steel and aluminum workers.
Canada, a significant U.S. trade partner, provides 16 percent of U.S. steel imports and 56 percent of aluminum imports. South Korea, a vital host to the U.S. military and buffer against North Korea, is the source of 10 percent of U.S. steel imports. Canada, the EU and the UK have reacted angrily to the announcement, and have promised to retaliate.
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Canada and China are important export destinations for U.S. agricultural products, and retaliation could harm American farmers. American agricultural exports to Canada in 2016 reached $23 billion, and China spent more than $12 billion on American soybeans.
China also owns more than $1 trillion of U.S. debt and is a major export destination for American planes and autos. China has more leverage against the U.S. than was the case in the early days of China’s emergence as an economic power. China’s exports to the U.S. were more than 40 percent of Chinese exports in 2000, today is less than 25 percent. In addition, exports are a far smaller percentage of China’s GDP today.
The potential damage from tariffs is the risk that American job losses exceed job gains in the protected industries, that retaliation from trade partners creates unintended consequences for other industries and workers, and that consumers pay higher prices for a wide range of goods. Although inflation seemingly remains under control, trade wars tend to be inflationary.
Protectionism is likely to be a negative catalyst for the stock market, and equities declined in the initial reaction to the tariff plan. Concerns about inflation may also create renewed pressure on bond prices, though Treasury yields remain below the highs reached in February.
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Trump’s Tariffs Could Harm Trade originally appeared on usnews.com
