How the new tariffs may backfire

Yesterday afternoon, the US President decided that he wanted tariffs.  Barely 24 hours later, he got them: a 10% charge on aluminum, and 25% on steel - reportedly up from the 7.7% and 24% respectively suggested by his pro-tariff aides because 10 and 25 are easily divisible by 5.  The announcement immediately prompted a sharp sell-off in US markets, with the S&P 500, the NASDAQ, and the Dow Jones all dropping around 2%.  US steel and aluminum companies which, earlier in the day had dropped over fears the announcement would be delayed, ended up receiving a 2% boost of their own, while foreign steel producers saw their own stock fall in after-hours trading.

Although the move is intended to threaten China and shore up US steel and aluminum production, it is unlikely to have the desired effects for three main reasons: it is targeting a problem which doesn't really exist as understood by the proposed solution, it is likely to threaten the continued stability of US trade agreements, and it is unlikely to reverse a decades-long trend of disappearing jobs in the steel and aluminium manufacturing industries.

First, neither China nor the United States relies upon the other country for its steel industry; only 1.9% of China's steel goes to the United States (the 19th largest market for its steel), while on the US side, China is the country's 11th largest source of steel, behind India which supplies 2% of steel in the United States.  The effects of the tariffs on China's steel industry would not be as destabilizing as they would be on Canada, Brazil, South Korea, Mexico, Turkey, and Taiwan, all of which export significant portions of their steel to the United States.  Nevertheless, China is alrady threatening retaliatory measures against US agricultural crops like soybeans, which could have a noticeable effect on US exports.  Unlike in the case of Chinese steel in the United States, the US is in fact the largest source of soybean imports to China.

 China is not even a top-10 source of US steel imports ( source ). It is unclear whether the tariffs will apply to countries like Canada, which has already indicated that it expects to be exempt.

China is not even a top-10 source of US steel imports (source). It is unclear whether the tariffs will apply to countries like Canada, which has already indicated that it expects to be exempt.

Second, the move will likely anger long-term US trade partners caught in the crossfire, who are likely to see the move as a clumsy and misguided betrayal of long-term trade agreements.  Unless ally countries are excluded from the new tariffs, the hardest hit country will be Canada, which sends 88% of its steel exports to the United States.  Canada and the United States are each other's largest trading partners for steel: 16% of all US steel imports come from Canada, and over half of all US steel exports go to Canada.  The Canadian government has already declared the tariffs "absolutely unacceptable", promising retaliatory measures if implemented.  Canada is the single largest purchaser of US exports globally, but other trade partners are unlikely to remain silent either.  The last time that the US attempted to impose steel tariffs under George W Bush, other countries retaliated by imposing tariffs against symbolically important US exports like oranges and textiles.  Today's announcement could also serve as another data point on a growing list of reasons for other countries to re-examine their export strategies, and reconsider whether the United States is capable of being a reliable and trustworthy trade partner.  This notion that would have seemed ridiculous only a year ago, but is being considered with increasing seriousness by many major US trade partners, who see the US market as increasingly protectionist and isolationist.

Third, the move is also intended to be a nod to one of the President's favourite talking points, traditional industry in the US Rust Belt, and a promise to return manufacturing jobs to the region.  Again, the move is unlikely to have the desired effect, as most of the 75% of jobs in the US steel industry which disappeared between 1962 and 2005 were lost due to automation and improved worker output, which increased production five-fold during that same time.  Even if the tariffs have the desired effect of increasing use of domestic steel and aluminum, they are unlikely to have the significant effect on jobs numbers that the President seems to be expecting.  So long as technology continues to improve manufacturing processes, employment in these industries will continue to decline even as output increases.

While the policy was announced today, it will likely take a few weeks for the Commerce Department to create actionable proclamations, which are necessary for implementation.  In the meantime, there is likely to be additional volatility around steel- and aluminium-related industries, both in the United States and abroad, and there may be an international trade war brewing between the United States and long-term trade partners.  This increase in volatility and uncertainty means heightened risk, but also potential opportunities for the savvy investor.