A storm in a steel teacup?

The start of March saw US President Donald Trump unveil new tariffs on steel and aluminium imports into the country, putting importers of both into the country on alert. During a meeting with US metal industry representatives at the White House on March 1, President Trump declared that levies of 25% and 10% would be placed on steel and aluminium respectively, in his bid to rebuild the two industries within the US.

“We’ll be imposing tariffs on steel imports and tariffs on aluminium imports and you’re going to see a lot of good things happen,” President Trump said at the meeting. “You’re going to see expansions of the companies … Pretty much all of you will immediately be expanding if we give you that level-playing-field, if we give you that help. You’re going to hire more workers and your workers are going to be very happy. They’re going to be very, very happy. … What’s been allowed to go on for decades is disgraceful. It’s disgraceful. When it comes to a time when our country can’t make aluminium and steel … you almost don’t have much of a country, because without steel and aluminium, your country’s not the same, and we need it.”

Widespread concerns

The move has prompted strong reaction across the globe, with fears that the decision could spark a trade war between the US and other parties. In response to President Trump’s announcement, EU Commissioner for Trade Cecilia Malmström said that the EU was “looking at possibilities to retaliate, meaning we will also put taxes or tariffs on US imports to the European Union”.

European Commission president Jean-Claude Juncker has stated that retaliatory levies could be placed on bourbon, Levi’s jeans and Harley-Davidson motorbikes — some of the US’ most iconic brands. Canada and Australia have also voiced their disapproval of the proposed measures, while Mexico, Japan and Brazil have said they will consider retaliatory steps if President Trump goes ahead with the plan.

In the UK, Downing Street said that Prime Minister Theresa May had expressed “deep concern” about the tariffs in a phone call with the President, while in China, the spokesperson for the National People’s Congress Zhang Yesui said that the country would take “necessary measures” if its interests were negatively affected.

Just days after the President’s announcement, World Trade Organisation (WTO) director general Roberto Azevedo warned that WTO member states needed to “stop the fall of the first dominoes” of a trade war, saying that the world risked a “deep recession”, while the International Monetary Fund has also strongly criticised the decision. Even lawmakers and donors for President Trump’s own party, including Speaker of the US House of Representatives Paul Ryan, have disapproved of the tariffs. Following the President’s announcement, the Dow dropped over 500 points while Nasdaq and the S&P 500 each fell around 1.5%.

Despite the opposition, however, President Trump remains defiant. On March 5, he told reporters that he was not going to relent on his decision, repeating a previously-tweeted threat to place a retaliatory levy on EU car exports in response to a move by them.

The shipping perspective

Looking at the impact of the metal levies on global trade, however, it is important to take a more all-encompassing view, rather than be swayed by President Trump’s characteristically-bombastic manner of delivering news and responding to disapproval surrounding it. Clyde Russell, Asia commodities specialist at Thomson Reuters, believes that if the tariffs don’t trigger an ongoing retaliatory trade war, it will likely become clear that they are a US own-goal and will probably only have a small effect on global commodities. Much will hang, he claims, on the rest of the world’s reaction to the new impositions.

“Assuming a global trade war can be avoided, the effect of the US tariffs should be to make steel and aluminium more expensive inside the country, while making it relatively cheaper elsewhere in the world,” Mr Russell explains. “If countries that export to the United States find they can no longer ship the same volumes, they can either find new markets or cut production.” Mr Russell forecasts that China will likely be the least affected by the measures among Asia’s steel-makers as only a fraction of its exports go to the US. While Japan and South Korea may feel more of an impact, Mr Russell claims that the steel gluts in these countries will likely reduce costs for their automotive sectors — and therefore improve their export competitiveness.

Moody’s anticipates that the direct economic impact of the tariffs on Asia at the macro level will be limited due to the small amount of aluminium and steel exports to the US in comparison to exports or GDP. Counter to that, Mr Russell says that with Canada, Brazil and Mexico constituting some of the biggest steel exporters to the US, they are most at risk from the proposed levies as they will find it difficult to compete in Asian markets.

There will also be impacts on other commodities as the levies will indirectly affect the prices of LNG, coal and crude oil in the US as these industries use steel as an input. Past experience could come to bear here. Commentators have pointed to President George W Bush’s 2002 decision to increase steel tariffs, partly to safeguard West Virginia workers, a move which later analysis revealed had a negative impact on the US economy because it elevated costs so much in industries that used steel. Greater prices for US oil, coal and LNG producers will erode their margins against international competitors, but elevated steel costs will probably make only a tiny change to actual production costs of commodities that the US exports.

“Firstly, US commodity exporters that are currently enjoying good times in crude, LNG and coal are likely to be somewhat more cautious in planning capital expenditure,” says Mr Russell. “Secondly, buyers of US commodity exports, while still largely driven by price, may subtly change their buying patterns in favour of other suppliers given the increasing view in the rest of the world that Trump’s America isn’t a friendly place to do business with.”

As the President has not followed through with his threatened tariffs as yet, the world is left waiting to see which countries the White House identifies as being affected by the tariffs. Still, Mr Russell claims that the bad reaction to the levies may give the Trump Administration “pause for thought”, and that ultimately the impact of the charges may not be as significant as they might first appear.