Trade wars seemed unthinkable just a few years ago. Then, the trend was towards globalization. Economists believe this maximizes economic gains around the world. There is an appealing aspect to this theory, tied to the idea that a rising tide lifts all boats.
While a rising tide may, in fact, lift all boats, it might not lift all boats by an equal amount. Sticking with the boats analogy for just a moment longer, the rising tide will lift the smallest and lightest boats more than the largest and heaviest boats.
In the global economy, the lightest boats are the emerging economies that received the biggest boost from globalization. The largest economies, including the United States and Europe, have struggled to deliver growth.
Tariffs Could Threaten Globalization
In recent days, the Trump administration announced a decision to impose tariffs on steel and aluminum imports from Canada, Mexico and the European Union, the latest action in a string of protectionist policies to crack down on alleged trade abuses.
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The tariffs will be 25% on steel imports and 10% on aluminum imports. The Trump administration will place quotas or volume limits on other countries such as South Korea, Argentina, Australia and Brazil instead of tariffs, according to the Commerce Secretary, Wilbur Ross.
In a proclamation announcing the measures, Trump wrote that he agreed with Ross’ “finding that steel mill articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”
According to CNBC, “Condemnation from U.S. allies poured in immediately. European Commission President Jean-Claude Juncker called the tariffs “unjustified” and said the EU will introduce countermeasures in the coming hours.”
A spokesperson for the British government also said the U.K. is “deeply disappointed” in the move and added U.S. allies “should be permanently and fully exempted” from the tariffs. Mexico also said it would impose tariffs in response to the U.S. actions.
More tariffs appear to be on the horizon. The White House has promised it would release a list by mid-June of about $50 billion worth of Chinese goods on which the U.S. will impose a 25 percent tariff.
Many politicians in both parties oppose the sanctions. So do some private sector experts.
The CEO of the National Association of Manufacturers CEO, Jay Timmons, told CNBC that the tariffs “could harm manufacturers in the United States.” The powerful political network funded by the conservative billionaire Koch brothers denounced the decision to implement the tariffs, urging the White House to “abandon” similar policies.
Trading the News
A potential trade war could hurt a number of stocks. Analysts with UBS believe the mere prospect of a trade war with China could weigh on shares of many S&P 500 companies with out-sized exposure to China.
“With the IP investigation, we see rising risks of trade actions against China and given inherent difficulties of a tariff on IP, tariffs could be placed on select China imports, which total $500 billion,” says UBS strategist Keith Parker.
“Thus, headline risk could be notable, but implementation of any tariff would be challenging making a broad impact less likely — across industries, imports from China are greatest for cell phones, tech hardware, apparel, semis and various consumer goods.”
Among the stocks likely to be the biggest losers are Skyworks Solutions (Nasdaq: SWKS) and Qualcomm (Nasdaq: QCOM).
But there could also be winners. American steel and aluminum producers have cheered the Trump administration’s metals tariffs, and shares of companies such as U.S. Steel (NYSE: X) look more promising.
The long term chart of AKS Steel (NYSE: AKS) shows the potential size of a turn around in the industry.
The industry has faced pricing pressure from imports and the tariffs news could spark a short term rally. But, history shows the best trade could be to buy put options on steel companies.
History Points to a Potential Trade
In 2002, U.S. President George W. Bush placed tariffs on imported steel. The tariffs took effect March 20 and were lifted by Bush on December 4, 2003. Research shows that the tariffs adversely affected US GDP and employment.
The temporary tariffs of 8–30% were originally scheduled to remain in effect until 2005. They were imposed to give U.S. steel makers protection from what a U.S. probe determined was a detrimental surge in steel imports.
At the time, the steel industry was in trouble. More than 30 steel makers had declared bankruptcy in recent years. Steel producers had originally sought up to a 40% tariff.
Canada and Mexico were exempt from the tariffs because of penalties the United States would face under the North American Free Trade Agreement (NAFTA). Additionally, some developing countries such as Argentina, Thailand, and Turkey were also exempt.
The typical steel tariff at the time was usually between zero and one percent, making the 8–30% rates seem exceptionally high. These rates, though, are comparable to the standard permanent U.S. tariff rates on many kinds of clothes and shoes.
The Bush administration justified the tariffs as an anti-dumping response, namely that the US steel industry had to be protected against sudden surges of imports of steel.
Immediately after they were filed, the European Union announced that it would impose retaliatory tariffs on the United States, thus risking the start of a major trade war. To decide whether or not the steel tariffs were fair, a case was filed at the Dispute Settlement Body of the World Trade Organization (WTO).
Japan, Korea, China, Taiwan, Switzerland, Brazil and others joined with similar cases.
On November 11, 2003, the WTO came out against the steel tariffs, saying that they had not been imposed during a period of import surge—steel imports had actually dropped a bit during 2001 and 2002—and that the tariffs therefore were a violation of America’s WTO tariff-rate commitments.
The ruling authorized more than $2 billion in sanctions, the largest penalty ever imposed by the WTO against a member state, if the United States did not quickly remove the tariffs. After receiving the verdict, Bush declared that he would preserve the tariffs.
In retaliation, the European Union threatened to counter with tariffs of its own on products ranging from Florida oranges to cars produced in Michigan, with each tariff calculated to likewise hurt the President in a key marginal state. The United States backed down and withdrew the tariffs on December 4.
The tariffs did not help the share price of steel makers.
This will be an important story to follow in the coming weeks. But it is important to research the industry because of its risks.
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