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Impact of U.S. Import Tariffs on Global Trade

30 August 20226 mins read by Angel One
Impact of U.S. Import Tariffs on Global Trade
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Recently, there was a major furore when Donald Trump proposed import tariffs of 25% on Steel and 10% on aluminium imported into the US. That would immediately mean that the steel and aluminium consumed in the US becomes more expensive and triggers inflation. However, the immediate reaction was threats of retaliatory tariffs. The EU, which is a major exporter threatened to impose retaliatory import tariffs on US imports ranging from Coke to Levis Jeans to Budweiser Beer to Harley Davidson Motorcycles. China and the rest of Asia are among the largest exporters of metals to the US and China has already threatened to trigger a trade war.

It would be interesting to remember two things about a trade war. Firstly, trade wars were last seen in the 1920s and 1930s when countries tried to encourage domestic industry by putting high tariffs on imports. Eventually, this led to rising inflation, production inefficiencies and finally resulted in the Great Depression of 1930s. Rarely has any nation benefited from a trade war. Secondly, trade wars tend to eventually degenerate into currency wars. When every country puts higher duties on imports, the only way left is for countries to devalue their currencies to make exports cheaper. This again leads to competitive devaluations creating losses across the globe. But first, why did the US take up the issue of trade war at this juncture…

Why is the US keen to protect domestic metal industry?

To understand this topic in perspective, it is essential to look at the graph below where the US output of aluminium over the years is compared with Chinese exports during the same years.

US output of aluminium compared with Chinese exports

Source: Bloomberg

Over the last 20 years, the US production of aluminium has fallen by over 2/3rd and that gap has been filled up by imports from China. Obviously, Trump is of the view that the US metal industry has actually suffered due to cheaper imports from other countries. Trump’s allegation is also that countries like China are able to export cheap aluminium and steel because their government gives them production subsidies which artificially reduces their production costs and allows them to dump these metals across the world at low rates. Trump made the issue of America’s rising trade deficit a major election issue and he is only following up on that.

Aluminium is one side of the story. Look at how China has dominated the 1.70 billion metric tonnes steel industry. The chart below captures the relative market share of countries in steel output…

market share of china in steel output

Like in case of aluminium, steel too is dominated by China and the US has actually become a marginal player in the production of steel. It is to rectify this imbalance that Trump has proposed the tariffs on steel and aluminium. But, how will it impact global trade?

Impact of US Tariffs on global trade…

We see the following implications if the US goes ahead and implements the stringent tariff measures…

  • Even as the US Steel industry is celebrating the decision to impose 25% tariffs on imports, other user industries are not pleased. Steel finds applications in a variety of sectors and is used for building cars, skyscrapers, roads, bridges, white goods, transport infrastructure etc. All these sectors will see higher costs which they may or may not be able to eventually pass on to the end consumer depending on the competitive scenario.
  • Then there is the worry about retaliatory tariffs. Take the case of the US Beer industry, which generates nearly 2 million jobs in the US. The EU has already threatened to impose retaliatory tariffs on US exports and beer is a major export. Companies like Anheuser Busch and Miller are major beer exporters and they could see fall in profits and job losses if EU was to retaliate.
  • While the user industries are likely to suffer, the US steel and aluminium industry are likely to see greater pricing power vis-à-vis their foreign competitors. That could translate into higher profits from US metal companies. However, construction accounted for 40% of US steel demand and auto accounted for 26% of US steel demand and they both could see negative repercussions.
  • In most tariff impositions, the jobs lost are more acute than the jobs saved. In a much smaller case, when Obama had imposed tariffs on Chinese tyre imports, he had claimed 1000 jobs saved. But the Paterson Institute has estimated that actually 3000 jobs were lost. The downstream effects can be much larger.
  • In a nutshell, the impact of the US import tariffs could come on two fronts. Firstly, the domestic user industries of steel like construction, automobiles, white goods, aerospace etc will see a cost increase which will have to be passed on. Secondly, companies like Anheuser Busch, Levi Strauss, Coke, Pepsi and Harley Davidson that are predominant exporters could face retaliatory tariffs.
  • The bigger worry on these trade wars is that they eventually become currency wars with each country trying to outdo the other in weakening their own currency. In the process the wealth destroyed will be much bigger than the wealth created. It has been consistently seen in previous trade wars and currency wars that hardly any nation benefits from the same. Also in this case, the US has threatened to impose tariffs on Chinese imports to the tune of $50 billion. This will not only invite trade retaliation from China but could also impel China to sell some of its $1.4 trillion US treasury chest. That may not be great news for global markets.
  • Finally, what could these trade tariffs mean for India? While India runs a trade surplus of $23 billion with the US, it ranks 9th in the country list and hence India is unlikely to be the focus. The major exports from India to the US are gems & jewelleries, pharmaceuticals, apparels and marine products. India accounts for less than 2% of US steel imports and is unlikely to be the target. These are unlikely to come under any strain.

The big risk for India will not be from the tariff imposition but the retaliatory tariffs. That is when it becomes a global phenomenon.


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