The Trump administration announced today that it will impose global tariffs on steel and aluminum imports; the proposed levels are 25% on steel imports and 10% on aluminum imports and the rates will apply to all source countries. While no normal declaration was made, the president said he would formally institute these tariffs next week and has promised that they would be in effect “for a long period of time.”
The White House said the tariffs are needed to “protect American-based businesses and workers from cheap foreign steel” that it claims is unfairly subsidized. A Commerce Department report pointed to several mill closures in the past few years and the loss of several thousand jobs.
“We are going to continue to protect American workers,” White House spokeswoman Sara Sanders said Thursday.
And while Trump’s stated intention behind the tariffs is to protect American jobs and domestic producers while punishing major foreign trade partners who “benefit” from US gullibility – i.e. China – not only is Trump unlikely to have much success, but the direct macroeconomic effects would be limited.
For one thing, imports of steel and aluminum together account for only about 2% of total goods imports (figure 1). The U.S. imports four times as much steel as it exports, and imports are on the rise again. While the U.S. imports steel from more than 100 countries, three-quarters come from just eight countries (figure 2), according to the International Trade Organization.
Furthermore, while Trump’s trade war is clearly aimed at China, the top exporters to the U.S. in 2017 were Canada, followed by Brazil, South Korea, Mexico and Russia. Other notables include Turkey, Japan, Taiwan and Germany. China did not even make the top 10, coming in at 11th spot, despite producing half of the world’s steel. Furthermore, as Marketwatch notes, the US already has restrictions on Chinese steel imports.
Meanwhile, the five targeted source countries for aluminum tariffs make up a much smaller share of aluminum imports, accounting for only 20% over the past three years, with nearly all coming from two countries, China and Russia (figre 3), according to Barclays.
In other words, if Trump hopes to punish China (and Russia and South Korea), he will have to try mach harder.
Meanwhile, according to Barclays calculations, the direct economic effects of anti-trade policies in these industries will be limited, given their small share in total goods imports. On the issue of what, if any, inflationary impulse will be generated from higher tariffs, it depends on whether firms view the increase as permanent and if the current state of the business cycle would contribute to a high pass-through rate from tariffs to final goods. That said, Barclays estimates tariffs at these levels to boost y/y rates of core CPI and PCE by an almost negligible 0.1pp. Separately, in regard to activity, the tariffs could reduce trade volumes and higher prices could restrain consumer and business spending. Together Barclays estimates they could reduce GDP growth by 0.1-0.2pp.
And while the direct threat to the US economy from Trump’s tariffs is negligible, the risk of course, lies in the response of US trading partners and whether the administration’s decision to impose restrictive trade policies is only the first in a series of moves. To be sure, as noted earlier, in light of the record US trade deficit (ex petroleum), it is likely that the White House will seek to enact further steps to restrict trade.
Finally, it is worth noting that as Bloomberg highlights, “in 2002 President Bush imposed tariffs of as much as 30% on steel imports before reversing course the following year amid a heap of retaliation from trading partners. What followed was a drop of more than 30% in the S&P 500, a weaker dollar and a rally in bonds that cut 10-year yields almost in half.”
It won’t take much for offshore holders of trillions in US securities – both stocks and bonds – and certainly the newly crowned Emperor Xi, to bark “sell”, and watch as Trump’s precious stock market implodes upon itself, forcing the administration to quickly reverse course.