Global stock markets have sailed onwards and upwards through a bunch of geopolitical scares since the current bull market started in 2009, largely because those scares didn’t really affect corporate earnings. But last week President Trump proposed imposing tariffs of 25% on steel and 10% on aluminium imports into the US. If this sparks a trade war, global markets may be sailing towards stormier waters.
Despite President Trump tweeting that “trade wars are good and easy to win”, you’ll struggle to find a credible economist who says trade wars are anything but a disaster. Adam Posen, who is the president of the Peterson Institution for International Economics and a previous member of the New York Federal Reserve and currently sits on the panel of economic advisors to the US Congressional Budget Office described the Trump tariffs as “straight up stupid”, “incompetent” and “misguided”.
Ed Hyman, who is vice chairman at Evercore and has been voted top Wall Street economist for the last umpteen years running, said in an interview with Bloomberg in response to the proposal: “I thought it really scary… The problem is not what we do, it’s retaliation… It’s pretty bad.“
Already the EC President Jean-Claude Juncker is talking about retaliation, mentioning the likes of Harley-Davidson motorbikes (based in House Speaker Paul Ryan’s home state of Wisconsin), bourbon whiskey (big in Senate Majority Leader Mitch McConnell’s state of Kentucky) and Levi Strauss (based in House Minority Leader’s district of San Francisco). In turn Trump’s response was to threaten to tax European car imports to the US (though that would be interesting given BMW is the largest auto exporter from the US). Canada, possibly the US’s closest trading partner, is also talking retaliation and China’s said it won’t tolerate its interests being harmed.
One of the mystifying things is why you’d take these risks given steel is not that big a deal for the US economy. CNBC pointed out that steel is about US$36 billion out of a total of US$18 trillion of US GDP, whereas steel-consuming industries are about US$1 trillion. And steel imports account for only about 28% of the US market, of which Canada has the largest share at 16%.
Blogger Josh Brown put forward a theory that President Trump is prone to making announcements that reflect the hot-button issues from his 2016 campaign whenever he wants to divert attention away from negative coverage of the White House. But even if he were harking back to the theme of China-bashing, China’s share of US steel imports is only 2%. And if he wants to help US manufacturers, some of the most valuable US exports, like planes and construction gear, will most likely be hurt by this move.
A new suggestion is that Trump floated the idea as an opening move in the forthcoming NAFTA negotiations. That might be true or it might be Trump’s way of trying to back himself out of a corner after a barrage of criticism, including from a number of big US companies.
The reality is protectionism has been on the rise all over the world. According to a study released late last year by law firm Gowling WLG, the world’s top 60 economies have adopted more than 7,000 protectionist trade measures on a net basis since the GFC. The EU has implemented a whopping 5,657 harmful trade policies, but comes out ahead having implemented 5,983 that are neutral or liberalising. The US is already the worst offender, having implemented a net 1,085 harmful policies – see chart 1.
Chart 1: Net protectionist measures implemented
(number of ‘liberalising’ measures, minus number of ‘restrictive’ measures)
The thing is, not a lot of trade policy tends to be announced via Twitter and most measures are less ‘blanket’ in their nature than taxing a particular product regardless of where it’s come from.
According to The Australian newspaper, Australia exports about $500 million worth of steel and aluminium into the US each year, much of it apparently from Rio Tinto supplying about one-third of the US’s aluminium market from its Canadian smelters. Bluescope may actually benefit because it has US-based operations, so it may see a reduction in import competition and Alocoa Australia could also benefit if more US aluminium smelters come on line and require bauxite. On the other side though, many countries will be wary of the risk of increased steel dumping.
While protectionism has been increasing, it has not been disruptive to markets. It’s when decisions seem capricious and provocative like this that risks go up that markets could face real speed humps, particularly stock markets, if corporate earnings are negatively affected. While Russia invading Ukraine causes barely a ripple in the number of iPhones that Apple sells, if phone prices go up because countries start slapping tariffs on electrical goods, that could have a real effect. Similarly, if price rises feed through to inflation pressures that could threaten the orderly unwinding of accommodative monetary policy settings in the US, Europe and Japan.
I’m normally quite sanguine about geopolitical risks, until they threaten company earnings, which at the end of the day are the primary determinant of share prices. Then it pays to watch carefully.
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