PMC Weekly Review - March 09, 2018

A Macro View: “Looming trade wars done “in a very loving way”"

Although he campaigned extensively on tougher trade policies, President Trump’s decision late last week to slap tariffs of 25% on steel and 10% on aluminum imports came as a surprise to many. With no agreement on the tariffs within the administration, their consideration has caused friction in the White House. On Tuesday, Gary Cohn, a free-trade advocate who served as the director of the National Economic Council, stepped down, leaving a policy power vacuum at a very delicate time. On Thursday, the President signed a proclamation on import tariffs that exempts Canada and Mexico, the two NAFTA partners with whom the US is currently re-negotiating its trade terms.

The audience received the tariff news with mixed sentiments as well. The market certainly didn’t welcome the development, with the Dow Jones Industrial Average falling 1.7% on the news. US steel and aluminum makers, and the shrinking workforce they employ, cheered the President's move—higher tariffs on foreign steel and aluminum would close the door to cheaper imports that have put such heavy pressure on these industries. The administration’s own Commerce Department recently vouched for tariffs or quotas, noting that employment in the domestic steel industry has shrunk by 35% in the last two decades, whereas the aluminum industry shed nearly 60% of its jobs between 2013 and 2016. However, trading with the world is a two-way street and hardly a zero-sum game, and thus worries abound regarding the repercussions that may follow. To begin, concern exists about the prospect of higher prices for products that use steel and aluminum, such as those of the aerospace, soft drink, and automobile manufacturers. As the Wall Street Journal noted, US steel mills employ 140,000 people. Companies that use steel employ 6.5 million. These companies, and the consumers who buy their products, may end up footing the bill by paying more.

Another significant concern is retaliation from our trading partners, who may feel antagonized by such tariffs and, consequently, ignite a trade war. Many countries, including China and those in the EU, have promised to fight the proposed tariffs on steel and aluminum with import restrictions of their own, targeting certain products designed to inflict as much political and economic damage as possible. Agriculture, for example, could take a hit, as many US farmers are heavily dependent on export markets. And considering the populist movements that are spreading elsewhere in the world, trade wars may not be as improbable as one might think. Just this week, anti-EU parties won big in the Italian general elections behind promises of “Italy first.”

Every student who has taken a macroeconomics class knows that trade wars are bad, because everybody loses and nobody wins. The World Trade Organization (WTO) was created from the need to establish a general agreement on trade to avoid trade wars. By disregarding these rules, the US is setting a precedent for other countries to exploit in order to protect their own producers. This could both undermine the system of trade rules upon which the WTO functions and bring the global trading system to a collapse. Without the WTO, trade among countries would still carry on, but without norms and procedures, chaos is guaranteed. In addition, trade wars, especially those against China, could have geopolitical consequences that are difficult to predict.

President Trump seems to hate trade deficits, although they are not necessarily evil, and their reduction could be targeted with other, less harmful means than tariffs. However, with the political vacuum left from Cohn’s resignation earlier this week, the White House has fallen into protectionist hands. Although the fallout from US tariffs on world trade appears gloomy, all we are left with is taking solace from the President’s promise that "We're going to do it in a very loving way. They'll like us better and respect us more."

Sonila Gjata, CFA
AVP, Portfolio Manager

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