US steel and aluminum tariffs: Are we in a trade war yet?

According to recent press reports, US President Donald Trump will implement substantial tariffs on imported steel (25%) and aluminum (10%) as soon as next week. The net impact of these tariffs will be negative for US growth. When the US implemented steel tariffs in 2002, economic studies found negative overall impacts to aggregate economic activity and a net loss of 200,000 jobs.  A recent study on the proposed aluminum tariff estimates 4 jobs losses in manufacturing for every job gained in the aluminum sector, with far more jobs lost in the broader economy due to slower overall economic activity. This is because higher costs on steel and aluminum leads to higher costs of inputs for everything from new cars to homebuilding, costs which are paid by consumers through higher prices, or by the producers through lower margins.

These tariffs are substantial, but in isolation, are not enough to materially impact the US economic expansion this year. US firms just received substantial corporate tax cuts and investment benefits, and these benefits may outweigh the pass-through costs of higher steel and aluminum prices. However, it is unlikely that these tariffs will be accepted by US trading partners without retaliation. The US is on the verge of a trade war.

For FSG clients, this should not come as a surprise. Our 2018 Events to Watch features both a “China-US Trade War” and a “NAFTA Exit” event. Arguably the US is already in a low-level trade war with both China and Canada. A trade war begins when Trump’s protectionist measures result in retaliatory protectionist measures from the aggrieved party, which then leads to more protectionist measures. When Trump implemented tariffs on solar panel and washing machine imports, targeted at China, China responded with its own import tariff on sorghum. There is speculation that China might continue to target agricultural exports from the US like soybeans or beef if the US continues to ramp up protectionist measures. China is the largest exporter of semi-finished aluminum products to the US, 31% of total – and these products would likely be covered by aluminum tariff.

The US also implemented duties against Canadian softwood lumber exports, which has led to a significant increase in costs for US homebuilders. The Canadian Government has so far held back from responding in kind, as it is already engaged in a difficult NAFTA renegotiation with the US, though it has challenged the legality of the lumber duties. Canada is the largest exporter of raw aluminum and steel to the US, and the second largest exporter of semi-finished aluminum products. They have been lobbying hard for an exemption to these tariffs. If they do not receive an exemption, this will exacerbate tensions in the already tense NAFTA renegotiations.

The US imports steel and aluminum from all over the world. This includes traditional allies like Germany, France, South Korea, and Japan, middle powers like Brazil, India, and South Africa, Gulf states including Saudi Arabia, Qatar and the UAE, as well as a large amount of both aluminum (16% or imports) and steel (9% imports) from Russia. The EU has already promised a retaliatory response if tariffs are implemented. It is hard to believe that other countries would not follow suit.

There are some immediate actions for MNCs to take. For one, government engagement teams need to ensure that industry associations continue to lobby hard for continued trade openness in countries hurt by US tariffs. But MNCs need to prepare for retaliatory actions by developing risk mitigation strategies to minimize potential supply chain disruptions in case trade barriers and localization pressures emerge. Contingency planning exercises are essential to identify further concrete steps that can mitigate the impact of new protectionist barriers, which should result in team alignment and ownership assignment around each elements of these contingency plans.

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