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Trump’s trade war threat

9 months ago
Trump’s style is often confrontational and he doesn’t like to back down so the chances are the rhetoric is likely to escalate from here.
Adrian Lowcock, Investment Director, Architas

Ever since Donald Trump won the US election in November 2016 he has indicated that he will put America first and is not afraid to impose tariffs on cheap imports where he sees there is an unfair balance and threat to US jobs.

He has now finally announced his plans to impose a 25% tariff on imported steel and 10% on imported aluminium in order to protect US industry. At present the tariff proposals are light on detail with no mention of which types of steel and aluminium they will cover and whether there will be any exemptions. However, the impact on markets was immediate. The US stock markets initially sold off although they recovered as investors rotated out of stocks most likely to suffer into defensive areas such as healthcare.

The announcement hit miners listed in the UK whilst in Germany, car manufacturers took the brunt of the falls as Trump hinted at further action should the European Union choose to retaliate. In particular he warned the US will slap a tax on cars made on the continent.

This is the problem with trade wars, they can escalate quickly and what starts out as a tariff on steel could end up with tariffs on cars, aircraft manufacturers or agricultural products such as beef or corn. Trump’s style is often confrontational and he doesn’t like to back down so the chances are the rhetoric is likely to escalate from here. Despite what the President claims, trade wars are not easy to win.

Even more importantly Trump’s tariffs are a blunt instrument and they don’t solve the initial problem which was Chinese over production of steel and the subsequent dumping of it on overseas markets. Tariffs would have a bigger impact on other steel producers, including some US allies, such as Germany, Canada or Japan and only result in China shifting to other markets in order to dump its steel.

Overall the impact is unlikely to be a positive one on global economic growth prospects.

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