Global trade wars have begun. Here is the opening salvo.
If Trump means what he says, and it’s a strong bet that he does, retaliations will reverberate.
Retaliations Announced
As expected in this corner, tit-for-tat trade retaliations have come from around the globe.
European Commission President Jean-Claude Juncker announced Friday Europe would react to U.S. plans to put import tariffs on steel and aluminum with tariffs on Harley-Davidson motorcycles, bourbon and bluejeans.
Canada is the top foreign steel supplier to the U.S., accounting for roughly 17% of all American steel imports, followed closely by Brazil and South Korea, according to Commerce Department figures.
Canadian Foreign Minister Chrystia Freeland warned the country “will take responsive measures” against the U.S. should the Trump administration slap tariffs on the country’s steel and aluminum. She deemed the proposed tariffs “entirely inappropriate” and “unacceptable.”
Swedish appliance maker Electrolux AB said it would hold back on a planned $250 million investment it had planned to make to modernize and expand its manufacturing operation in Springfield, Tenn., following Mr. Trump’s announcement.
Jürgen Kerkhoff, president of the German Steel Federation, said he saw the risk that Mr. Trump’s tariffs could badly damage European steelmakers.
“If the EU doesn’t act, our steel industry is going to be left footing the bill for American protectionism,” Mr. Kerkhoff said. “Diverted trade flows threaten Europe with a new steel glut when as things are the EU market is far from tackling (its own) import crisis.”
Under Mr. Trump’s two predecessors, the U.S. and South Korea negotiated and completed a free-trade agreement that came into effect in 2012. Mr. Trump says it was a bad deal that widened the U.S. trade deficit, but the two sides haven’t agreed how to revise it.
Supply Chains Hit Bulldozers to Beers
Tariffs could ripple through U.S. economy From Bulldozers to Beer.
Some industries are already lining up for those exemptions. The Beer Institute, a trade group, called for “cansheet” aluminum to be excluded from any new trade barriers. “Imported aluminum used to make beer cans is not a threat to national security,” said Jim McGreevy, the group’s president.
Remy Nathan, vice president for international affairs at the Aerospace Industries Association, said higher costs and retaliatory measures could disrupt global supply chains and hit exports, denting the aerospace and defense industries’ $86 billion trade surplus last year. The group represents companies including Boeing Co. and Lockheed Martin Corp. “It’s the indirect industrial impact we are most concerned about,” said Mr. Nathan.
“It’s going to be expensive,” said Ed Bolas, chief financial officer at DyCast Specialties Corp., a maker of parts for products including cutting tools and engines. “All of it will impact the consumer.”
The Association of Equipment Manufacturers, which represents heavy machinery giants Caterpillar Inc. and Deere & Co., said new trade barriers will hurt American exports. Caterpillar executives have said tariffs could drive up prices for domestic steel and make it costlier for it to produce mining trucks, bulldozers and other equipment.
Steel is the largest input cost for big machinery producers, accounting for around 65% of raw material expenses at Caterpillar, with aluminum adding another 10%, according to JPMorgan analyst Ann Duignan. She estimates agricultural equipment makers such as Deere are even more exposed to raw material inflation, unless they can claw back costs through higher sale prices.
Farm groups feared Mr. Trump’s move would invite retaliation against U.S. crop exports, after China recently raised the prospect of tariffs on sorghum, a grain used in livestock feed.
“These [steel and aluminum] tariffs are very likely to accelerate a tit-for-tat approach on trade, putting U.S. agricultural exports in the crosshairs,” said Brian Kuehl, executive director of Farmers for Free Trade, a Montana-based group set up to defend U.S. agricultural exports. “The agriculture sector knows from experience that our ag exports are the first to be hit by retaliation,” Mr. Kuehl said.
Soaring Supply
Note that US demand has been relatively constant for years. The number of steelworkers it takes to meet most of that demand has fallen precipitously.
Steel Production vs Steel Employment
It’s impossible to make a reasonable case there is a national security threat over steel. Our imports come from Canada, not China!
Steel Glut a Good Thing!
By the way, a glut of steel is a good thing. It lowers costs and makes thing more affordable.
Standards of living rise when products are more easily affordable!
Trade Wars Not Winnable
Those who say trade wars are winnable aren’t thinking, they’re spouting nonsense.
Since Trump has his eye on South Korea, it’s likely the next big target.
Economic Madness
The bottom line is simple: If its good for the consumer, it’s good policy.
Instead, Trump is promoting trade wars that mathematically cannot be won.
For a mathematical explanation of trade deficits, please see Trump’s Tariffs Show He’s “Clueless About Trade”.
Also consider Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?
Trump’s trade policies are set to exacerbate the next global recession, but economic illiterates are egging him on.
A global trade war has begun. Trump fired the opening salvo. It’s economic and mathematical madness.
Mike “Mish” Shedlock
“Time for tariffs was in the 1980’s-1990’s. NAFTA destroyed the middle class. Its too late now.”
The notion NAFTA destroyed the middle class is total bullshit and easily refuted.
I don’t care how much more I have to pay if it makes us more self-sufficient as a country.Stop your damn whining and get to work.What a bunch of defeatists.Let’s find a safe space with some crayons and coloring books.
Yes, and that makes it even more complicated. There presumably wouldn’t be a tariff on those cars. But, what about the parts? The steel parts would still contain European steel, most likely, and imported as parts rather than as raw steel, it would bypass the steel tariff, giving a cost advantage to those cars.
Also don’t European car manufacturers employ a lot of people in the US in plants in SC, AL, TN?
Same with the border wall in Mexico, time for the wall and deportations of illegals was 80’s and 90’s – now its too late
Time for tariffs was in the 1980’s-1990’s. NAFTA destroyed the middle class. Its too late now.
I see the President threatened the EU with tariffs on European cars. Duh. He has to do that. US cars will go up probably by 10% due the tariff on steel. With no tariff on EU cars, they will stay the same price, since they aren’t made with US steel. Unless he wants to kill the US automakers, he has little choice.
There is something to be said about how is it do you make all your decisions on as a nation? Is what is good for Wall Street and GDP growth rule every single decision you make? It’s similar with immigration. Is IS definitely better for GDP growth and Wall Street for US, Canada, Western Europe to keep flooding their countries with 3rd world immigrants. Keeps the population growing, lower cost labor coming in, more people to tax to pay pensions. But what does that do to the culture of the nation in the long run? Or maybe nobody gives a F as long as their stocks and RE keep going up. Some places have literally changed ‘overnight” – like Santa Clara County (Silicon Valley) going from 85% white in the 1960’s to 30% white in 2018. And if people think that doesn’t have political consequences think again. The immigrants we get today vote about 80% for liberals.
That is a pathetic excuse. The issue of automation is a more recent one. US jobs are being exported for damn near 40 years.
As a specific example, I knew a guy that ran a small business in Kansas City called Midwest Wire Hanger. On March 5, 2002 Bush imposed a steel tariff of 8-30%. I believe that the 30% applied to the steel wire that he used to make hangers. The tariff was lifted in December of 2003, but it was too late for him. Chinese Hanger makers were able to buy Chinese steel wire for 30% less, and thus could sell their hangers for 30% less than he could, so he was out of business in a matter of months. The Chinese acted quickly, and bought all his equipment, and shipped it back to China. Once the tariff was lifted, there was no way to restart the company, and the jobs were lost permanently, even though the tariff was only temporary.
What I find peculiar is that some people posting here actually think that a tariff will protect or create jobs. Then, they take the next step and presume that anyone who opposes tariffs doesn’t care about jobs. I oppose these tariffs for exactly the opposite reason, because I believe they will cost a very large number of American jobs. That is what has historically happened in the past.
YOU be careful what you wish for. These so-called free trade deals have destroyed middle America and literally killed many of them. If you and your fellow Wall Street snowflakes think going further in this direction will not have consequences, you are fools.
“If free trade is great, why do countries retaliate?”
Because they are F’ing stupid. Or they know full well what they are doing is wrong but they do it anyway to win votes.
Take your pick.
To sell a good on a market, it must be competitively priced.
Which means, one’s total cost to produce it, must be competitive with those of other market participants. IOW, the producer is a price taker. If he charges more than the prevailing price for his output, people simply won’t buy it. So, he has no way to increase his product’s market price. He either sells at market price, or he can lower it, in order to gain market share.
One can easily break down costs into a)raw materials, b)taxes, fees and legal/regulation compliance costs, c)executive/management compensation, d)financing costs, e)shareholder compensation and f)general labor compensation.
Since Trump’s latest tweetwank does nothing to executive compensation, nothing to taxes, legal and compliance costs, nothing to financing costs, nothing to shareholders’ compensation and nothing to the world market price of the final product; that leaves raw materials and labor compensation the only two factors to be affected by it.
Now, question of the day (for first midterm in kindergarten arithmetic 101): What must necessarily happen to labor compensation, when the cost of raw materials increases, while everything else aside from labor compensation stays the same?
If Trump extends his wall to cover the entire border, instead of just the one shared with Mexico, and then bans or punitively tariffs every single good that uses steel as an input, recursively, as well; he just may succeed in driving up the domestic price of final goods, to the point where both nominal labor compensation AND nominal raw materials prices can be increased at the same time.
In doing so, he will ensure that not a single American made product of any kind, will be internationally competitive over time. This is exactly what the Latin American import substituting “structuralists” did, back in the 50s and 60s. While most Asian economies at a similar, or lower, stage of development, went the other way, welcoming foreign competition and free trade…..
Had to laugh at EU’s response, targeting “American icon” products — Harley Davidson, bourbon and blue jeans. Ok, Trump’s tariffs may be a misguided attempt to shore up two failing industries, but Junker is just being a jerk. This kind of euro trash talk really makes you want to pull out of NATO. Germany is so rich. Why can’t they pay for EU’s defense. Let’s save some money!
We need more facts ! How much of those “Canadian” steel exports to the US are merely re-exports of dumped Chinese steel? The one fact we are absolutely sure of today — there is no “Free Trade”. Almost all significant trade between nations is managed in some form or another. It is foolish in the extreme to let a near-religious belief in a theoretical construct blind oneself to reality.
These guys support the so-called free trade policies because it enables them to export American jobs and import cheap stuff made by slaves/prisoners abroad. It also helps them to drive down the wages of the jobs that still exist in the US. So, it is not surprising to see them whine and howl when there is even the suggestion to level the playing field.
A trade war is already being waged on Americans by foreign countries dumping goods made using slave labor or prison labor. You guys call it a war only if the average American fights back. Go to hell!
Treasuries not an issue. If the US runs a trade deficit foreign nations mathematically must accumulate dollar assets – nearly always treasuries
Good point about the NATO withdrawal issue. The status quoists on Wall Street and DC don’t want their boats to be rocked while Americans are drowning and literally dying in many cases. I find their protestations and howling to be worth less than used toilet paper. They need to be flushed down the drain, pronto!
I am wondering, if EU retaliation to the US on brand’s like Levi’s (the one Junker mentioned today) may actually harm countries in Asia too, where the actual “Levi’s US stuff” is produced?
Depending how EU decides to retaliate, perhaps, at the end of the day Trump may be thinking that he “killed two birds with one stone” where EU retaliation sanctions do hurt US a little bit, but will probably hurt Asian producers too?
Walmart’s customers are forced to do that because they are put in a race to the bottom by job-killing and people-killing free trade policies.
Yeah, if the producer uses slave labor and prison labor and the consumer has to go into debt to buy the product, either the authorities have to intervene or the world goes to hell. If the Wall Street snowflakes think they can survive the latter, they are stupid.
Since we don’t know the details of Trump’s plan we can only speculate mistakenly.
I witnessed the demise of the US fastener industry in the 1980’s while China was exporting and we shut down most all our plants. Tariffs can work in some situations but a country like Canada we have an even trade balance on steel so it’s a horrid idea. They could have announced a policy with more details.
If free trade is great, why do countries retaliate? Free trade economists say its great to let your factories leave for protected economies that will overproduce and drive down prices globally. Europe should welcome cheap steel imports from America in the future. They should be thanking Trump.
China is the biggest surplus nation. The US wants to slow their military modernization and push back in the South China Sea. In a trade war, their GDP will slow much more, possibly even tip them into depression given their credit bubble.
By the same logic, no nation ever wins a war because everyone loses soldiers and equipment. If you focus solely on economics, yes, it’s a negative in the short-term. If free trade models are wrong and onshoring business increases domestic employment, it’s not clear that that would reduce overall standards of living if it means wage hikes and small factory towns coming back to life, and populism dies off. If you include national security, it’s a fact that surplus countries are in much worse shape in trade war. Trade deficit nations bounced back quicker in the 1930s, the world’s factory USA took much longer.
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What’s protected? What? Tariffs raise costs and lower standards of living. Rickards is nuts about lots of things. He’s making increasingly nutty forecasts on Bitcoin, SDRs and other things.
Every other country protects its economy by having tariffs and import taxes. Only the US is stupid enough to let anyone sell their junk here with no restrictions. A la Jim Rickards: tariffs do NOT impact the economy. The Great Depression started way before the Smoot-Hawley tariffs, and tariffs were raised in 4 years past (1861, 1864, 1890 & 1922) and no depression occurred. Free trade doesnt exist, except in neo-liberal globalist thinking (that got us where we are today).
Trump threatened NATO withdrawal and many countries finally paid their fair share. If the threat of a trade war will get fair/reciprocal trade practice between our partners, it should be good for the US economy. US has been on the short end of the stick for too long and that’s why trade deficits persist.
“The bottom line is simple: If its good for the consumer, it’s good policy.”
It is NOT good for the consumer if he has to go into debt to be able to buy even the cheapest crap imported goods.
OK. It is NOT a trade war if average Americans are getting hit. It is a trade war only if they hit back. Got it. 😉
This may be the only area in which I’d have preferred Hillary to Trump
Bastiat in “Economic Sophisms”: http://oll.libertyfund.org/titles/276#Bastiat_0182_688
Many people – politicians especially – would do well to avail themselves of the wisdom contained in this work.