Trump Using Tariffs As A Geopolitical Grandstand
Based on Donald Trump's track record, one might discount the likelihood that his administration will see through tough actions that ultimately impact negatively on the US economy. Policies delivered so far appealed to those in the population who support his agenda on immigration, climate, jobs and trade. His rhetoric has generally been quite one-dimensional and direct, with the secondary or tertiary effects to the economy appearing to have little bearing on his plans.
The main aim of import tariffs on steel and aluminium is to support US producers - industries that collectively employ in the order of 200,000 people. However, the real impact would be felt by the US industries that consume these materials, such as automobile, transportation and infrastructure companies; their factor costs would go up and they employ many times more Americans than materials producers.
The uncertainty surrounding trade policy has pushed US steel prices (hot rolled coil) to highs, particularly relative to EU and China prices. The comparative disadvantage of tariffs on US metals consumers would be exacerbated by a stronger dollar. To the extent US protectionist measures become permanent, worries of surplus redistribution of stock from China to elsewhere such as the EU could be subject to margin economics. Bear in mind that China is pro-actively managing over-capacity in areas such as steel and aluminium production - a tougher trade environment in these industries could accelerate rationalisation.
Life within the aluminium market has been tumultuous lately. In addition to trade disputes, the international markets have had to contend with a strong dollar as well as US sanctions on Rusal, one of the world's biggest producers of aluminium.
Trump's negotiation tactic of push hard and recede back to mutually tolerable ground, is well known. The announcement that tariffs will come into effect tomorrow on the EU, Canada and Mexico serves to shock. To the extent the EU and the others are disinclined to engage in an actual trade war or spend time engaging in ugly disputes via the WTO, one might expect some speedy deal-making behind the scenes. One expects scope for the EU to find a less-damaging outcome - either in the form of softer tariffs or specific trade arrangements. For Canada and Mexico, this looks like another step in the NAFTA negotiations.
Larry Lau is fund manager of the Trium Diversified Macro Fund