Last week, we found out that a new round of tariffs could change global trade dynamics. The administration is planning to impose a 25% tariff on steel imports and 10% on aluminum. This is not the first protectionist action; it comes after the US exited the Trans-Pacific Partnership and put tariffs on lumber, washing machines, and solar panels. We find out this afternoon if this is more bark than bite, but in the meantime, our Director of Economic Research, Ali Wolf, will tell you what you should know ahead of the announcement.
GOOD FOR THE FEW, BAD FOR THE MANY?
Downstream industries, higher prices, and inflation
Most economists would tell you tariffs are bad, regardless of their political affiliation. Consensus is that levying tariffs will only benefit a select few (in this case, the suppliers of the raw materials), to the detriment of many. For example, the companies that buy domestic steel and aluminum would face higher costs when trying to manufacture secondary products like bikes or trucks.
Higher material costs will likely be passed on to consumers, which could drive US inflation, something economists are already worried about. In some cases, the costs could be absorbed by manufacturers, which could ultimately lead to employment challenges in the future if companies make smaller profits.
Sample of industries that would feel the repercussions:
- Oil and gas (Texas, North Dakota, Alaska)
- Car makers (Midwest and Southeast)
- Beer distributors (New York, Midwest)
- Aerospace (Washington, East Coast)
In the housing industry, this could impact the cost of windows, faucets, gates, fences, stoves, refrigerators, and more, in a time when rising costs are already a hindrance.
Retaliation and trade wars
The most common fear about tariffs is the potential for retaliation. The world has become interwoven and globalization has lifted the broader economic climate. Disrupting integrated markets could have wide-reaching ramifications, including lower international trade, which typically leads to higher prices for consumers as well as the aforementioned inflation. The European Union has already threatened to retaliate by targeting quintessential American-made products like Harley-Davidson motorcycles and bourbon. The Foreign Minister and Prime Minister of Canada were also unhappy, but new developments suggest they, and Mexico, are likely temporarily exempt. This is a relief as Canada is the largest supplier of steel and aluminum for the US. With this development, there’s hope that the announcement will relax the possibility of trade wars.
KEEP YOUR EYES ON
- Negotiations around the North American Free Trade Agreement (NAFTA). Peter Navarro, a White House trade adviser, said a permanent exclusion for Canada and Mexico is on the table if the countries come to an agreement on reworking NAFTA to best suit America’s needs.
- How politicians react. Tariffs aren’t a Democrat/Republican thing. In fact, there are a lot of Democratic senators in the Rust Belt that are applauding the efforts of President Trump, and many Republicans that aren’t keen on the idea. In fact, 107 Republican members of the House of Representatives asked the president to only focus on countries that conduct unfair trading practices. Since it appears many Republicans are reluctant to switch from free trade, can they influence the president?
- Stock market fluctuations. After the initial announcement of the proposed tariffs, the stock market took a hit. Since then, we’ve seen some resilience as investors try to determine the likelihood of trade wars. When you see the gyrations in the stock market, just remember that the fundamentals of the economy have not changed, it’s just the future uncertainty.
A look back in history provides context around tariff trepidation. The Smoot-Hawley Tariff Act was signed into law in June 1930 (less than a year after the Great Depression started) that taxed over 20,000 imports. Some argue that this widespread tariff policy added considerable strain to the economic climate and exacerbated the Great Depression. Others would argue that the discussion leading up to the actual passage of the act was one of the big reasons the economy slumped. While the handful of tariffs passed and proposed by the current administration are minor compared to Smoot-Hawley, it speaks to the potential risk in such policies.
Contact us to discuss how we can help you plan for the future in today’s economic climate.
Ali Wolf, Director of Economic Research
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