Could we see an unhinged move towards protectionist policies with Gary Cohn exiting the White House? And what is the possibility of a full-on trade war. Read on to get our insights on these stories and more.
Is the World Headed for a Trade War? – Tariffs, tariffs, tariffs. The impending 25% tariff on steel and a 10% tariff on aluminum seem to be the only economic topics making headlines this week, many of which square on fears of sparking a global trade war that could adversely affect industries and consumer products ranging from automakers to beer cans, bourbon, and jeans. 100 House Republicans signed a letter to President Trump this week objecting to the proposed tariffs, but the White House has made it fairly clear of their intent to hold their ground on the policy. It does appear, however, that Mexico and Canada may be entitled to some ‘carve-outs’ from the policy that can protect them from tariffs under NAFTA, which is still being negotiated (according to Bloomberg).
Digging into the issue on tariffs, a few truths come to the surface that dispel many of the common myths about who will be hurt and/or helped by this policy. For one, for all the hubbub about China being the biggest perpetrator of steel dumping in the U.S. it should be noted that China is not even one of the top 10 exporters of steel to the U.S., according to the US Department of Commerce. Chinese dumping happens in other parts of the world and that affects prices which affects U.S. producers, but the tariffs themselves are not targeted at Chinese imports per se.
Interestingly, the biggest trading partners that would be affected by these tariffs are Canada and Brazil. Canadian and Brazilian steel comprised a respective 16% and 13% of U.S. steel imports as of September 2017. The same applies for aluminum – the top foreign sources of aluminum during 2013 – 2016 included Canada (56%), Russia (8%) and the United Arab Emirates (7%) (according to Seeking Alpha). But here’s the real kicker that leads us to believe that, by themselves, the steel and aluminum tariffs should not derail this bull market and economic expansion: steel and aluminum’s combined share of total U.S. imports is less than 1.5%1. We believe that these tariffs alone should not have the broad impact many fear. What will be important to watch, however, is the potential feedback loop of retaliatory tariffs that may result.
Meanwhile, in the Auto Industry – concern is springing up from the auto industry, which is worried that the recent sales declines may continue once the tariffs take hold and prices rise on the consumer level. According to the American International Automobile Dealers Association, the proposed tariffs “couldn’t come at a worse time,” adding that manufacturers are not prepared to absorb rising import costs. According to a UBS analyst operating in the auto industry space, Ford’s raw material costs, which already were likely to rise by $1 billion this year, would increase by another $300 million due to the tariffs. General Motors’ raw material costs could experience a similar outcome, with the potential for an additional $200 million in cost on top of an already expected $800 million increase.
Administrative Fallout – and finally, the Trump Administration lost a key asset this week in Gary Cohn, who helped shepherd through the tax cuts and who also fought hard for reworked regulations in the financial sector and against tariffs. With Cohn gone, the stage appears to us to be set for an unhinged move towards protectionist policies and as mentioned above, the possibility of a full-on trade war, fanning fears of protectionist tariffs and a full-blown trade war. Should Cohn’s replacement be someone who more closely echoes the President’s sentiments against current trade arrangements, we could expect to see a tilt towards more trade battles ahead.
Whether it’s trying to stay up-to-date on trade policy or trying to predict how the financial sector may be affected by changes in the White House, it can be difficult for investors to truly feel prepared for what’s to come.
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