On March 1,Trump announced that his administration would start imposing a 25% and 10% tariff on imported steel and aluminium respectively.
This came after the Department of Commerce concluded that the importation of steel and aluminium threatens the US national security, and came up with a number of restrictive practices as recommendations. This is also a reaction to the ‘unfair trade and bad policy’ adopted by China by selling steel and aluminium below production cost due to excess capacity. However, China would be less affected because its trade with the US is already restricted by American import controls and duties.
But are these measures really going to benefit the US economy and population? Here there are some of the reasons why they may not.
Impact on manufacturing sector
Unless the steel and aluminium production in the US would suffice to cover the US demand of these raw materials, US companies will still have to import them.
According to Reuters, during 2017, the US produced 840,000 tonnes of aluminium and imported over 5.7 million tonnes, and it is the biggest importer on steel, with 35 million tonnes imported in 2017. Quite far from an indication of self-sufficiency!
The sectors that would be impacted most are the ones which utilise steel and aluminium in their production process which would therefore become more expensive. One of these sectors is the automotive sector, being an important contributor to the US GDP, representing 3% – 3.5% of the GDP - and employing 1.7 million of people.
Since the announcement by the Department of Commerce was made public on February 16, 2018, the share price of General Motors lost 8.31% (after a low of -10.6%), Fiat Chrysler lost 5% (after a low of -10%) Daimler lost 5.5% (after a low of -7%), CNH Industrials lost 7% (after a pick of -10%) since they would see their production costs increase.
Another sector that suffered from the announcement was the equipment manufacturing with Caterpillar losing 3% (after a low of -6%), Deere & Co 6% (after a low of -10%).
Inflation
If these new tariffs are applied and the additional costs are passed on to customers, the new tariffs may have an impact on inflation. However, if wages do not adjust accordingly, this may result in a loss of consumer power. This may also potentially lead to a decrease in production which would eventually affect US manufacturers.
Trade war
In the last weeks we have seen the countries most affected by these measures threatening to respond to the new trade tariffs by imposing trade tariffs themselves on the main products imported from US.
The European Union’s top trade officials mentioned Kentucky bourbon, Harley-Davidson motorcycles and Levi’s jeans, cranberries, orange juice and peanut butter as possible targets of the new tariffs. From its end, China promised ‘necessary response’ to the introduction of the new trade tariffs.
This global tit-for-tat could hurt American exporters’ competitiveness, undermining the economic stimulus coming from Trump’s deregulation push.
Disclaimer:
This article was issued by Elisabetta Gaudiano, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as a personal recommendation/ investment advice including tax and legal advice.