Below is an excerpt of the rapid-response alert shared with our clients, hours after President Donald Trump imposed steel and aluminum tariffs on the EU, Mexico, and Canada. These tariffs were announced back in March, but the US granted these countries temporary exemptions while they engaged in trade negotiations.
As we outlined in a blog post, US President Trump has been using the threat of unilateral tariffs as a negotiating tactic to force trading partners to revisit previous trade agreements, in order to strong-arm concessions that would lower the US trade deficit and support US industries.
International executives should be working with their management teams within affected geographies to identify specific ways in which their supply chains are at risk and what alternative options they can put in place to protect themselves, while lobbying both in the US and in affected markets for non-imposition of tariffs. Regional leadership teams need to assess whether there is likely to be a commercial impact which would need to be compensated for in other markets, which may necessitate putting more pressure on other country or regional teams to exceed targets.
Understand the context for protectionist actions
It is important to look at these tariffs as part of a broader picture: Trump truly believes in trade protectionism. One of his main campaign promises was to renegotiate trade agreements. As Trump approaches the midterm elections in November 2018, though he has threatened or imposed tariffs on every single country with which the US runs a large bilateral deficit in goods (his preferred metric), Trump has little to show for it. The process of NAFTA renegotiations began in April 2017, and now appears unlikely to conclude in 2018. Trump entered into bilateral negotiations with the EU after he threatened steel and aluminum tariffs, but these talks went nowhere. Trump threatened $50bn in tariffs and other protectionist measures on China, but again, the implementation of these tariffs has been delayed. The only successful trade negotiation was a rework of the Korea-US trade agreement, which barely made headlines.
What will be the broader economic impact?
There will be some downward adjustments to macroeconomic forecasts from these combined tariffs, but the overall effect will be small for the US. The total amount of US steel and aluminum imports in 2017 was just under $50bn, while the tariffs threatened on China also add up to around $50bn. Together, this amounts to 4.2% of US imports in 2017. Tariffs lead to increased costs, which will have to be borne by either producers or consumers. But in the middle of a strong US economic expansion with limited underlying inflation, these additional costs can be absorbed without much difficulty. The hardest-hit by these tariffs will be Canada, but even there, the estimated loss of exports is only $3.2bn, or 0.2% of 2017 GDP.
For FSG clients, please contact your Client Services Director to consult with our analysts about the implications of these events on your business.
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