ECA

USA, Metals: Could steel & Aluminium Tariffs Trigger a global trade war?

21.03.2018 Chris Little

Coface Regional Risk Assessments of the Metal sector: High in North America, Emerging Asia, Western Europe & Latin America

WHAT?

On 1st March 2018, US President Donald Trump announced that his administration will implement tariffs of 25% on steel and 10% on aluminium on all imports into the United States, whatever their source. This has triggered strong reactions of disagreement from the country’s global trade partners. At this point, some countries have publically stated their disagreement, while others have not made any public statements. However, it is likely that all of them – including Canada, China, and the European Union (EU) – will retaliate, which raises concerns that this could lead to a global trade war.

WHY?

As part of his rhetoric to “bring back jobs” to the United States, a key part of his 2016 election campaign, President Trump continues to pursue the implementation of protectionist measures. While his administration has been working on such measures since the spring of 2017, he announced on the 1st March that the following week, he will sign an order to impose customs tariffs on all imports of steel and aluminium, at respective rates of 25% and 10%. Some observers consider that this announcement is a way of creating diversion to mask the difficulty President’s administration faces (including new resignations in the President’s circle of advisers and the on-going federal investigation into the potential Russian implication in the 2016 US Elections). Others might also believe that this move is a new demonstration of its commitment to “protecting” the American economy and its workers, specifically American steel and aluminium producers.

This announcement took place during the same week that Chinese Economic Adviser Liu He and his delegation met US Treasury Secretary Steven Mnuchin at the White House to discuss trade. The announcement could therefore be interpreted as a potential signal to demonstrate that the US administration will continue to be tough on trade with China, and particularly on Chinese imports. China, who is the world’s biggest steel producer and consumer, has been accused by many leading governments – not only the USA – of practicing dumping on steel prices. As a consequence, the EU and the United States implemented higher customs tariffs on Chinese steel imports in summer 2017.

 

RISKS

There is a high risk of retaliation toward the USA from its international trade partners, raising fears that this could set the ground for a global trade war. However, at this stage, there is only limited information available on the measures President Trump plans to implement. This measure is unlikely to negatively impact the Chinese steel industry: after suffering from higher import tariffs from the United States and the EU last year, local Chinese producers started to reorientate a sizeable part of their production toward the domestic market. However, we anticipate that this could have negative impact on other US trading partners in the metal sector, such as the EU, Korea, and Canada, who could potentially implement their own protectionist measures toward the United States, specifically within other sectors, such as agri-food. Another risk could be a rise on legal procedures at the World Trade Organization level. Increased tensions and trade disputes between the largest global players could adversely impact the current positive global economic prospects. Coface expects global GDP growth to reach 3.2% in 2018, up from 3.1% in 2017.

President Trump’s announcement renders his “pro-business” economic policy confusing. While this measure will support American steel and aluminium producers, it is adversely welcomed by US-based business leaders in other sectors, such as oil & gas, automotive, and construction, because it will impact their input costs and prices, and therefore their competitiveness. Although the Trump administration’s economic policy has begun to receive significant support from the US business community – notably following the reduction of the corporate tax rate from 35% to 21% – his announcement to implement these metal tariffs contributed to a plunge in the S&P 500 US equity market (-1.3% vs +3.3% for S&P 500 Steel index – see chart).

Overall, we expect this measure to create additional challenges in the Metals sector – particularly the steel segment, which is already in a recovery phase globally, with the Chinese in an overcapacity situation on steel output, and other regions suffering from Chinese competition. Coface’s regional assessments of the Metals sector are currently at “High Risk” in all regions, except in Central & Eastern Europe (“Medium Risk”). Given the positive global economic developments, and specifically, positive trends in automotive, construction and ICT in most regions, we expect steel prices to pursue 2017’s rising trend, despite the fact that the prices remain well below historical trends.

About Coface:

Coface, a world-leading credit insurer, offers 50,000 companies around the globe solutions to protect them against the risk of financial default of their clients, both on their domestic and export markets.
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