How big of an economic threat are Trump’s steel and aluminum tariffs? – Business


U.S. President Donald Trump’s announcement of hefty tariffs on imported steel and aluminum have several countries around the world frantically trying to seek an exemption from the world’s biggest economy on the trade tax.

The European Union (EU), Japan and Australia are among others asking to be exempt from the proposed import duties of 25 per cent on steel and 10 per cent of aluminum. Canada and Mexico have already been spared.

But as negotiations on trade continue between the U.S. and the rest of the world, economists say the impact of these new tariffs on the global economy is not as big as the threat of a global trade war.

“The global steel industry is huge and politically powerful, but it accounts for less than two per cent of world trade and only a very small fraction of global gross domestic product (GDP),” said Andrew Kenningham, economist at research firm Capital Economics in a note.

“In itself, it will not make much difference to the direction of the world economy,” he said.

For the U.S., Trump has long touted and tweeted that the economy will see big gains from the move, as he throws a lifeline to domestic manufacturers. 

Benefits vs. costs

The country is the world’s biggest importer of steel, buying about 35 million tonnes of the commodity last year, according to Reuters.

But economists said the net impact of the tariffs on the U.S. economy is negative, because they benefit just a small slice of the economy, while harming nearly everyone else.   

“With Canada and Mexico excluded from steel and aluminum tariffs, the actual decline in trade would likely result in less than half a percent of total U.S. imports,” said Royce Mendes, economist at CIBC. Canada and Mexico account for a quarter of the steel imported by the U.S.

“That being said, any benefits attributable to tariffs are likely to be outweighed by costs. That’s because both steel and aluminum are intermediate goods, suggesting that they will adversely affect other manufacturers,” he added.

Sal Guatieri, economist at BMO, said U.S. consumers will feel the pinch as manufacturers pass on the higher costs of production materials.

“The tariffs will extend an upswing in steel and aluminum prices and users’ input costs. Industries, such as fabricated metals that operate at capacity, will likely pass along the cost increase, cramping spending power,” he said in a note.

“As one example, Americans could pay about one per cent more for an automobile, or just over $300 US. Sure, they won’t stop driving, but they will have less money to spend on other stuff.”

Overall, the primary metals industry in U.S., which is largely steel and aluminum, accounts for just under 0.7 per cent of the economy.

Even if U.S. manufacturers increased their output of the two metals, it would add only 0.05 per cent to GDP, according to Guatieri.

Michael Dolega, economist at TD Economics estimates that about 5,000 to 10,000 jobs could be added to steel and aluminum production in the U.S., but there could also be a loss of 25,000 to 50,000 jobs in metal-intensive sectors like machinery and transport equipment.

Biggest risk

While the tariffs are not expected to have a big impact on the U.S. or global economy, economists agreed that the risk of a trade war stemming from the move could have much bigger consequences.

The EU has already warned that it is preparing counter measures if it is not exempted from the tariffs, while officials from China said over the weekend that a trade war would only bring “disaster” to the global economy.

Economists from Bank of America Merrill Lynch released a list of top ten exporters of steel and aluminum to the U.S.that were most likely to retaliate to the new tariffs.

The EU topped the list, followed by Brazil, South Korea, China and then Japan.

“An in-kind tariff by the United States’ top ten trading partners would expose close to 42 per cent of total U.S. exports, leading to a widening in the trade deficit,” they said.

Data last week showed that the U.S. trade deficit had jumped to an over nine-year high in January, with the country’s shortfall with China widening sharply.


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