Earlier this month, President Trump roiled the stock market by announcing that he would impose a 25% trade tariff on steel imports coming into the U.S. from foreign countries, and a 10% tariff on aluminum imports. The Dow Jones Industrial Average stock market index immediately dropped 2%.
Then last week, Trump proclaimed additional tariffs on $60 billion of imported goods from China, sending the market tumbling further.
The worst-case scenario would have been a global trade war, in which countries engage in a tit-for-tat retaliation against each other. The European Union, for example, would impose tariffs on U.S. motorcycles, bourbon, peanut butter and orange juice.
Trump used national security as a justification for imposing these tariffs. He would have had difficulty getting approval from the World Trade Organization. Many of the countries he targeted, like Canada, Japan and the European Union, already have mutual defense treaties with the U.S. A tariff on aluminum would have no impact on national security. The manufacturing process for aluminum requires bauxite, and the last U.S. bauxite plant closed 30 years ago.¹
Even from the point of view of protecting jobs in the U.S., the tariffs make no sense. Steel tariffs, for example, might have benefited 140,000 American steel workers, but it would have endangered the jobs of 6 1/2 million workers in construction, auto manufacturing, oil and gas pipelines, beer cans, agriculture and food processing.²
Already, Trump has granted exemptions to the foreign metal tariffs to Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea. These exempted countries account for more than half of the $29 billion in steel sold to the U.S. in 2017. He also left the door open to other allies, like Japan, that did not get an initial exemption. Instead of tariffs, Trump is now talking about quotas. Quotas, compared to tariffs, might be welcomed by foreign exporters, since they would benefit from higher prices. With tariffs, the U.S. government collects the higher duties.³
It may be that Trump had no intention of actually imposing broad tariffs, but wanted to use the threat of tariffs as a bargaining chip to wrest concessions from other countries. The U.S., Canada and Mexico are in the midst of renegotiating the North American Free Trade Agreement (NAFTA). South Korea is also renegotiating its own free-trade agreement with the U.S.
One of Trump's main beefs with China was its requirement for U.S. companies manufacturing or trading in China to have a Chinese corporate partner, who would own 51% of the joint venture, and would have access to the American company's trade secrets and intellectual property. Even before the tariffs were announced, the Chinese government had agreed to lift the majority stake rule for U.S. securities firms and insurance companies. After three years, all caps would be removed. It will be the largest liberalization of China's financial services industry in eleven years.⁴
Global currency markets are very sensitive to trade flow because currency pricing is dependent on the stability or disruption of trade. However, the South Korean won, the Taiwanese dollar and Singapore dollar are all trading near their strongest levels in three years. World trade overall is expanding at the fastest rate in six years. China has responded with their own tariffs against U.S. products, but in a very muted way -- $3 billion in tariffs against U.S. products, versus $60 billion in tariffs against Chinese products.⁵
Since the initial panic, investor sentiment has warmed, and the market has already made back half of its initial losses. It seems as though the President is pursuing his common pattern of tapping out a dramatic tweet, followed by quietly walking back from his initial pronouncements. In the end, the "tariff turmoil" may turn out to be much ado about nothing.
¹ Wall Street Journal 3/9/2018
² Marketwatch 3/5/2018
³ New York Times 3/22/2018
⁴ South China Morning Post 11/10/2017
⁵ www.bobveres.com 3/1/2018
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