Last Thursday, President Trump signed an order which will impose a 25% tariff on steel imports and a 10% tariff on aluminum imports. The duty is more flexible than originally anticipated and will leave imports from Canada and Mexico exempt, unless NAFTA discussions break down. It also leaves the possibility for other countries to negotiate a lower levy later on. The tariffs are scheduled to go into effect 15 days after the signing.
In and of themselves, the tariffs should not have a significant impact on trade; while the US imports 30% of its steel, together steel and aluminum only account for 2% of trade. Since the President’s speech at Davos, investors had anticipated the tariffs, resulting in aluminum prices rising 20% higher. The consequence could be increased production costs for automobile manufacturers and the construction industry.
If we look back to the last time the US imposed steel tariffs for an example, we must go back to 2002 when George W. Bush imposed temporary tariffs of 8-30%. The tariffs were supposed to stay in effect until 2005, but were rescinded in December 2003 due to the WTO ruling that they were illegal. Politics played a role then, and maybe playing a role today. President Bush was trying to garner votes during the midterm elections from Pennsylvania and West Virginia, two important steel producing states. This week, in a heated race voters in Pennsylvania’s 18th congressional district are electing a new Representative in a seat vacated by a Republican. Also, NAFTA talks with Canada and Mexico have stalled. The President may view this move as a way to move those discussions forward. Finally, the President has taken aim at trade policy with China. He would like to use trade as leverage with China against North Korea and has also stated that he wants to punish China for theft of intellectual property. We will have to wait and see if the duties have any effect.
In 2002, steel production initially increased, but eventually fell back to earlier levels. Any economic benefit from increased domestic production could be offset by the knock-off costs. The President is using national security as the reason behind the tariffs which falls within the letter of WTO rules. The Swedes used this pretext as a way to protect shoe manufacturers in the 1970s. However, the WTO may not agree with the President, which could lead to nations retaliating.
And this is the larger concern: how will the aftershocks affect global trade? Remember the Smoot Hawley Tariff of 1930 was meant to protect American jobs. It did anything but that. A renegotiation of trade pacts to help American interests could be beneficial — the US has a reputation of being a poor negotiator — but removal from trade agreements which reduces trade will be detrimental.
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