Market concerns about the potential impact of Trump policies on economic activity that emerged in the wake of the 2016 election seemed to fall on deaf ears, at least during the first 12 months of the administration. The world is now waking up, and this week’s announced tariffs on steel and aluminum imports highlight a possible spoiler to the otherwise synchronized global expansion, not to mention the lack of underlying knowledge about trade.
The notion that trade wars can be won has been knocked down in introductory economics textbooks since day one, as well as by the statistics. For example, the steel tariffs introduced by President Bush in 2002 ultimately impacted US economic growth and employment and they were lifted at the end of 2003—two years ahead of schedule. There was a study produced by industries that used steel (i.e., automakers) that claimed that the increase in steel prices brought about by the tariffs had resulted in close to 200,000 lost manufacturing jobs. This was almost ten times the number of jobs that were supposedly created in the steel and steel supplier industries.
Fast forward 17 years and Mr. Trump introduces a 25% tariff on steel imports and a 10% tariff on aluminum. The only good news out of this week was the delayed decision to exempt Canada and Mexico from the tariffs provided they played ball on NAFTA negotiations. The squeaky wheel gets the grease, or so they think
To put this whole thing into perspective, consider that steel represents only 2% of the world’s economic output. And this industry is a small fraction of the US economy—dwarfed by consumption. In 2017, the US imported $29 billion worth of steel out of a total $2.4 trillion of goods imported into the country.
It doesn’t take a PhD in math to figure out that the incidence of these new tariffs will fall squarely on consumers of steel in the US and not the producers. The rationale behind the tariffs is that it will bolster employment, increase economic growth and be in the interest of national security. As we learned in 2003, if the price of steel rises as a result of tariffs, users of steel will either mark up prices to maintain profit margins, or cut costs elsewhere, as in employment.
The latter would be quite noticeable given that the US is coming off a lengthy trend of strengthening employment. This morning, reports showed a stronger than expected 287,000 increase in non-farm payrolls, with manufacturing payrolls up 31,000. Back in the mid-1950s there were more than 600,000 Americans employed in the steel industry, compared to less than 150,000 today. This development was because of wholesale unfair trade practices by the rest of the world, but because steel producers have become more efficient with the use of electric arc furnaces that can turn scrap into steel. As for the price impact, if the net cost to users increases (as in military equipment), then this places an additional burden on the budget.
Again, this is not the real threat. Even if we add transportation and mechanical equipment uses of steel the share of steel used doesn’t come close to construction and infrastructure. Given that we still haven’t seen a policy on national infrastructure this could make it even trickier if the price tag goes up because of tariffs. Given that tax cuts are already baked into the pie, the economy and markets will need infrastructure to extend the expansion and rally.
Getting back to Canada and Mexico, the exemption is good for these two countries, but also the US. This is because they represent the largest and third largest exporters of steel to the US, respectively. That alone could soften the cost and employment impact from the tariffs but it is conditional on the ‘deal’ maker getting what he wants on NAFTA. There is a window, however narrow, for Canadian and Mexican aluminum and steel producers to take advantage of this. While, India’s ArceloMittal (which is the world’s largest steel company and owns the largest plant in Ontario) saw its stock decline further from its late-January peak, Canada’s only publicly-traded steel supplier (Russel Metals) jumped after the exemption news. We’ll take it for now.
Canada: ADP payrolls, existing home sales, manufacturing shipments
US: CPI, retail sales, producer prices, business inventories, Empire manufacturing, import prices, Philly Fed index, housing starts, industrial production, Univ. of Michigan sentiment
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