Trump’s Steel Grenade
At times when fear and loathing are amped-up it often pays to take a more dispassionate look at what is likely to happen, as opposed to what is feared will happen.
The planned U.S. tariffs on steel and aluminium certainly had the effect of raising political and economic temperatures across the world amid fears that President Donald Trump is taking the first step in a global trade war that will end in a 1930s-style depression.
However, there is still a long road to travel from the imposition of tariffs of 25 percent on steel and 10 percent on aluminium to a collapse of the post-World War II global economic order, even if you believe Trump has opened that door and is preparing to charge through it.
Much will depend on what the rest of the world does in response to the U.S. moves.
The smart play is probably to condemn vociferously in public but to do very little in terms of retaliation, while at the same time reaching out to the Trump administration in the hope of toning down its anti-trade rhetoric and actions.
Assuming Trump’s measures don’t spark an ongoing tit-for-tat trade war, it will likely become clear that the tariffs are likely to have only a small impact on global commodities, and are effectively an own-goal for the United States.
That’s a big assumption, and one not yet in evidence given Trump has seemingly doubled-down on his anti-trade views, saying in a tweet that“trade wars are good, and easy to win,” a phrase that may yet become his political epitaph.
But the extent of the poor reaction to the planned tariffs, especially from industries Trump has counted among his supporters, such as oil and gas, coupled with the negative reaction of equity markets may yet give his administration pause for thought.
At any rate, assuming a global trade war can be avoided, the effect of the U.S. tariffs should be to make steel and aluminium more expensive inside the country, while making it relatively cheaper elsewhere in the world.
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.
WORRIES NOT YET REALITY
Given that China, the world’s top steel producer, only ships a fraction of its exports to the United States, it’s likely to be the least affected among Asia’s steel makers.
Japan and South Korea may find the going tougher, but if those countries do end up with steel gluts, it will likely lower costs for their significant automotive industries, thus improving their export competitiveness.
Aluminium is also a major input into car manufacturing, as well as in other manufactured goods that are commonly imported by the United States.
Canada, Brazil and Mexico, the first-, second- and fourth-largest steel exporters to the United States respectively, will find it tough to compete in Asian markets, and are therefore most at risk from Trump’s planned tariffs.
At the margin, lower Brazilian steel exports may free up some iron ore for increased exports, but it seems likely at this stage that seaborne iron ore is unlikely to suffer much change to either demand or supply from the U.S. tariffs.
Looking at other commodities, it’s likely that a similar pattern emerges – namely that the United States hurts itself more than others.
While steel tariffs won’t directly increase the cost of crude oil, liquefied natural gas (LNG) and coal in the United States, it will deliver an indirect impost, given these industries use steel as an input.
Pipelines, import and export terminals, railroads and mines are all significant steel consumers, and higher costs for U.S. producers of oil, LNG and coal will serve to erode their margins against competitors elsewhere in the world.
Again, much of this is at the margin, with higher steel costs likely to make only a tiny difference to actual costs for producing the commodities that the United States exports.
Far more important is the likely hit to sentiment, which is two-pronged.
Firstly, U.S. commodity exporters that are currently enjoying good times in crude, LNG and coal, are likely to be somewhat more cautious in planning capital expenditure.
Secondly, buyers of U.S. 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.
For example, a South Korean buyer of LNG or coal may choose to buy from Australia instead of the United States, if the price differential is small, as a subtle way of getting back at Trump for hurting South Korea’s steel industry.
Again, none of this is certain and behavioural economics are far from an exact science.
“I’ve had a lot of worries in my life, most of which never happened,” American writer and humorist Mark Twain wrote.
Trump’s proposed tariffs have certainly increased the world’s worries, but if the response is mature and considered, the worst fears may not be realised.