CCR Magazine

You are here  :Home arrow News arrow Risk News arrow Current US trade tariffs won’t derail global growth
Contact Us Newsletter Signup RSS Feeds

Current US trade tariffs won’t derail global growth PDF Print E-mail
Tuesday, 13 March 2018
On March 1, President Trump announced that the US would impose tariffs on imports of steel and aluminum at rates of 25% and 10%, respectively. The action would be conducted under Section 232 of the Trade Expansion Act of 1962, in line with recommendations from the Department of Commerce (headed by Secretary Wilbur Ross) that such imports “threaten to impair national security.” Originally pertaining to all countries, the Administration later made exemptions for goods imported from Canada and Mexico, and left the door open for other concessions going forward. The initial market reaction, as expected, was positive for primary metal producers, while broad indices and Treasury yields fell on fears of a trade war.     

Mike Salice, Director of Research, SKY Harbor Capital Management

On March 1, President Trump announced that the US would impose tariffs on imports of steel and aluminum at rates of 25% and 10%, respectively. The action would be conducted under Section 232 of the Trade Expansion Act of 1962, in line with recommendations from the Department of Commerce (headed by Secretary Wilbur Ross) that such imports “threaten to impair national security[1].” Originally pertaining to all countries, the Administration later made exemptions for goods imported from Canada and Mexico, and left the door open for other concessions going forward. The initial market reaction, as expected, was positive for primary metal producers, while broad indices and Treasury yields fell on fears of a trade war.

Despite ensuing financial market volatility and tense media coverage, we caution that the directly impacted sectors are relatively modest in size. Aggregating data from the Department of Labor, Department of Commerce and the Federal Reserve, steel and aluminum’s share of total imports appear modest (~ 1.6%), the sectors employ relatively few workers and the impact on industrial production is quite small. As such, despite the expectation of higher steel and aluminum prices in the near term, these measures are not likely to meaningfully contribute to inflationary pressures, or vastly alter the pace of economic growth.

Furthermore, NAFTA members are slated to be exempt from such tariffs. Looking at steel and aluminum imports into the US, Canada ranks #1 and Mexico is in the top five, further muting the scope of current proposals. Japan, a top-10 steel exporter, has already begun to challenge the aforementioned national security rationalization (given its status as a US ally), and could join the list of exemptions in the near term.

Longer term, we see some chance of economic harm arising from downstream margin compression and reciprocal tariffs. With respect to the former, consumers of steel and aluminum should undoubtedly face higher costs in the near term, although metals arriving through exempted countries and the restart of idled domestic capacity should buffer some of the move (in fact, US Steel has already announced its intent to restart a blast furnace at its Granite City Works plant, expecting a sustained uptick in demand). As a result, any economic growth arising from higher domestic steel and aluminum output should be largely offset by reduced income (and, potentially, diminished consumption and investment) stemming from higher prices to downstream users. Below, we summarize the anticipated winning and losing sectors as a direct result of recently announced tariffs.

Retaliation, on the other hand, is a bit more difficult to handicap. Goldman Sachs published a report[2] detailing the EU’s response to the imposition of steel tariffs and export subsidies in 2002 and 2004, respectively. Their research found that retaliation typically focuses on three categories of goods: the subject of protections, consumer goods (particularly those with a luxury tilt) and agriculture. Jean-Claude Juncker, European Commission President, has since publicly stated that potential targets for trade reciprocity include American made motorcycles, bourbon and blue jeans. While these items do fall into the often-targeted consumer goods category, they seem engineered to elicit pressure from high-ranking politicians on both sides of the aisle (Speaker of the House Paul Ryan is from Wisconsin, home to Harley-Davidson Motorcycles; Senate Majority Leader Mitch McConnell is from Kentucky, home to many bourbon distilleries; House Minority Leader Nancy Pelosi is from California, home to Levi’s jeans). More recent examples of retaliation follow similar themes – in February, China initiated anti-dumping and anti-subsidy investigations into US sorghum exports two weeks after the US imposed tariffs on solar panels and washing machines.

Overall, while the risk of a trade war has risen materially over the last several days, we would caution that currently contemplated tariffs appear quite marginal given their limited scope, and may merely be an opening salvo ahead of more important debates surrounding NAFTA, the TPP, the Korea-US Free Trade Agreement amendments and a more encompassing negotiation surrounding US-China trade dynamics. Therefore, while cognizant of potential harm in the event of trade war escalation, we remain sanguine on the fundamental strength of the economy and prospects for coordinated global growth.

Themes to watch
· Analysts are identifying ancillary service providers that should benefit from the restart of idled domestic steelmaking capacity
· High yield earnings continue to trend positively, with EBITDA growth persisting in the double-digit range
 

latest issue

CCR Cover

The latest edition of CCR Magazine, the leading editorial publication in the UK credit industry, is out.

Read the latest issue online

Risk Sponsor

This Risk News section is currently available for sponsorship.

Please click here to contact us about our site sponsorship opportunities.

subscriptions

CCR is the premier magazine for consumer and credit professionals. It provides an independent voice to the industry, breaking major news stories and running in-depth features.

As a magazine, it works with and campaigns on behalf of the credit industry to promote its importance as a centre of potential profit and business development to the wider business world.

Subscribe to CCR Magazine

CCR World Magazine


 

Providing information and analysis for thousands of senior credit professionals worldwide, every quarter.

Find out more

GTS Media Ltd
81 Cambridge Road
Southend-on-Sea
Essex
SS1 1EP

Registered in England No: 05483197