Tariffs Put Markets on Alert

  • Tariffs Put Markets on Alert
  • Italy Goes to the Polls
  • China Seeks Financial Stability

This week, the White House signaled its intention to place punitive tariffs on imports of steel and aluminum. Markets and analysts reacted quickly, and negatively.

The move toward trade protection is not at all unexpected; the administration was elected on a platform of leveling the playing field with countries seen as playing unfairly. The aspiration is to promote American industries and preserve American jobs.

The measures previewed this week are an unusual starting point for the campaign. China has been a focal point of U.S. trade concerns, but we import relatively little steel from them. (And we are a net exporter of aluminum to China.) Some of our biggest suppliers of steel are our closest economic and strategic allies, including Canada and Japan.

We won’t know the specific details of the measure until next week. But it is likely that U.S. Commerce Secretary Wilbur Ross will have the authority to grant exemptions to countries that file appeals. This feature might tend to ameliorate the adverse consequences that might ensue. And because the measure does not directly confront the Chinese, it seems unlikely to be the flash point for a trade war.

That said, this week’s news is a troubling signal. Increased tariffs will raise the cost of raw materials and could add to inflationary pressures at a time in which markets are especially sensitive to them. Federal Reserve Chair Jerome Powell seemed calm about inflation prospects during his Congressional testimony this week, but the upside risk is clearly there.

Many businesses in the United States use steel, and the measure would hinder their profitability, potentially limiting their willingness and ability to hire and invest in new equipment. Meanwhile, it will not be a simple task to ramp up U.S. production of steel and aluminum; a portion of American capacity is outdated and not cost-effective. The short-term impact on growth may be negative.

And finally, markets will certainly wonder what might be next. It could be that the administration is only putting trade partners on notice and will pursue further grievances at the bargaining table. But if more serious and provocative protection is forthcoming, it would be a serious concern for global economic performance.

We’ll have a more extensive analysis of the situation next Friday.