President Trump’s tariffs on aluminum and steel imports could mean several things for the U.S. and global economies. As of March 8, 2018, levies on imports of steel will rise in price by 25% and aluminum by 10%. There are some details that still need to be clarified, like the scope and duration of the tariffs, but many implications can already be identified. A bipartisan motion urged President Trump to reconsider the tariffs as they could potentially be detrimental to the United States. One of the bright sides of the tariffs is the ability to make certain countries exempt. Mexico and Canada have already been exempted from the tariffs but there are still several U.S. allies that have not been exempted. Trump is running the risk of isolating the United States in a trade war that would hurt all Americans.
The U.S. is the largest importer of steel in the world; because of this economists are skeptical of how the tariffs are going to benefit the U.S. economy. Some claim that there will be an overall negative effect on employment because of prices rising. Uncertainty is the only sure thing moving forward from these tariffs.
The U.S. steel and aluminum industries are the main benefactors of the tariffs. Some companies have promised to hire more employees as demand for U.S. steel and aluminum are certain to rise. Steel and aluminum manufacturers will have to ramp up production to keep up with demand. While some jobs might be created in the steel and aluminum industries, some will be lost in other industries directly affected by the higher commodity prices.
Foreign countries affected by the tariffs have proposed enacting their own tariffs on U.S. goods like orange juice, bourbon, denim, cranberries, peanut butter, and motorcycles. The top importers of U.S. agricultural goods can be found in Figure 2. Many countries that import U.S. agricultural goods export steel and aluminum to our country. These tariffs would hurt U.S. exports and raise prices for consumers. These actions and reactions could be the start of a tip-for-tap scenario between world trade participants.
President Trump might be starting a trade war with some of the biggest nations in the world. In response to the proposed tariffs by other countries, Trump has suggested invoking even more tariffs. A two-way of analysis of steel imports and agricultural exports of the U.S. with four different countries can be found in Figure 1. The trade relations between the U.S. and these countries have been stressed from Trump’s tariffs. Trade wars have an overall negative effect for all nations. The wars reduce global trade and make consumers poorer. Trade wars signal an impending downward spiral for all countries involved.
Similar tariffs were imposed by President George W. Bush in 2002 on foreign steel. Back then, the U.S. had enormous demand for steel. U.S. steel manufacturers were not able to keep up with the increased demand, highlighting an inefficiency in the economy, identified by the tariff. The high demand made steel prices skyrocket. The change in price due to these tariffs can be observed in Figure 3. Price rose by over 60% while capacity utilization remained relatively the same. Steel consuming companies were heavily impacted by the tariffs. The companies were left with three options: lose profits, lay off workers, or raise prices. We must learn from our mistakes in the past when it comes to trade. There are other less confrontational methods of reducing trade deficits that need to be considered.
These tariffs could be the start of a protectionist regime by the Trump administration. Market volatility has been relatively high in wake of these tariffs. Now it is not certain how far our president will go, there needs to extreme caution and calculation with the our next economic and trade decisions.
Stock Pick: Nucor Corporation (NUE)
The Nucor Corporation is the largest steel manufacturer in the United States based in Charlotte, NC. It has a wide variety of operations from steel mills, steel products, and raw materials. Operations mainly focus on providing steel products for the construction, auto, and energy industries. Construction is important because the industry could also see a boost in the future from increased infrastructure initiatives from President Trump. Nucor is positioned well in light of these tariffs and the potential for gain is evident.
Bender, Michael, and Peter Nicholas. “Tariffs to Be Set Amid GOP Dissent.” Wall Street Journal, 8 Mar. 2018, pp. A1–A6.
Baker, Peter , and Ana Swanson. “Trump Authorizes Tariffs, Defying Allies at Home and Abroad.” New York Times, 8 Mar. 2018, www.nytimes.com/2018/03/08/us/politics/trump-tariff-announcement.html.
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Petroff, Alanna. “EU could hit US peanut butter and cranberries with tariffs.” CNN Money, 7 Mar. 2018, money.cnn.com/2018/03/07/news/economy/eu-tariffs-us-trade-trump-steel-aluminum/index.html?iid=EL.
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Francois, Joseph, and Laura Baughman. The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002. The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002, www.tradepartnership.com/pdf_files/2002jobstudy.pdf.
Varathan, Preeti, and Gwynn Guilford. “Higher prices, layoffs, and economic nosedives: What Trump’s trade war could mean for you.” Quartz, 6 Mar. 2018, qz.com/1220847/what-trumps-tariff-trade-war-could-mean-for-you-higher-prices-layoffs-and-economic-nosedives/.
Krugman, Paul. “Trade War, What Is It Good For? Absolutely Nothing.” The New York Times, 3 Mar. 2018, www.nytimes.com/2018/03/03/opinion/trade-war-what-is-it-good-for-absolutely-nothing.html.
Hankla, Charles. “Opinion: What history teaches us about who wins in trade wars.” Market Watch, 3 Mar. 2018, www.marketwatch.com/story/what-history-teaches-us-about-who-wins-in-trade-wars-2018-03-02.
Figure 1: Could farmers get stuck in a steel trap?
Figure 2: Top 30 U.S. agriculture export destinations, 2013-15 average
Figure 3: Rise in steel prices due to Bush tariffs in 2002