JEFFER: Aluminium & Steel Tariffs - A Potential Trade War?

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On August 1st of 2017, President Donald Trump had insinuated that he would uphold his stratagem concerning the strengthening of small businesses — a proposition which undoubtedly appeared significant and captivating for anyone in the trade business. President Trump’s words had in fact left a stirring impression that even businesses outside America will be able to benefit from his proposal. “Together we are unleashing a new era of American prosperity, perhaps like we have never seen before”

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However, this said ‘American prosperity’ may now be seen to jolt the global trade market indeed ‘like we have never seen before’. On March 2018, Aluminium & Steel Tariffs were imposed by Donald Trump’s presidency on the importation of these materials. It should nonetheless be pointed out that this action was also taken by George W. Bush all the way back in 2002, who had imposed a 30% tariff on the importation of steel. As a consequence, the European Union had taken a firm stand against this action; declaring it as a ‘political action with no economical motive’. In fact, the European Commission had proposed tariffs at rates as high as 100%. Therefore, will the same consequences arise from President Trump’s tariffs? Could a potential trade war unravel between the US, EU and Chinese counterparts?

This additional duty on steel and aluminium imports falls under Section 232 of the Trade Expansion Act of 1962. This allows for the scrutinisation of importing duties in terms of national security, thus excluding the protection of the industry. However, the European Union has challenged this section, claiming that these tariffs are only being imposed to protect the US industry, and not to safeguard national interest. Therefore, the EU has complained to the World Trade Organisation - the main nongovernmental organisation that regulates international trade - and asserted a claim for compensation. Chinese counterparts, on the other hand, are trying to negotiate the tariffs rather than oppose them. In fact, they have reportedly offered to negotiate a 50% tariff on what President Trump asserted. This therefore suggests that the trade market will be affected, regardless of how the three main players of the trade market react.

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In terms of the US, it has been established that it imports only approximately a third of its steel demand, but 90% of its aluminium. Given that the tariffs do not inherently apply to domestic production, the larger businesses in the trade market which operate from the US but sell their products worldwide will subsequently be negatively affected. The options which such companies are presented with are to either increase the price of their final product, pay the tariff difference upon importation, or increase the price of shareholdings in order to make up for the difference. Either way, they will suffer a loss, either from the consumer aspect, or from the shareholders themselves.

In terms of the EU, it is feared that those materials which are categorised as premium quality (as opposed to Chinese produce) will not be entering the US for importation and will flood the European Market, leading to a drastic decrease in their prices, especially with regards to aluminium. This will drive producers towards a massive financial hit. The effects of these tariffs, therefore, does not reflect the same consequences which the EU suffered in 2002. Instead, we seem to be lead towards a cumbersome trade war between a potentially failing European market, versus that of a latent American small business-led industry.

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On the other hand, Chinese counterparts who engage in a direct trade relationship with the United States have suggested negotiations through means of retaliatory tariffs, as had been done by the EU in 2002. The US emphasized, however, that these tariffs will not have a direct effect on China, as the combined imports of both steel and aluminium materials have only accounted for 0.2% out of all goods received from China in 2016, even though the latter was regarded as the largest producer of these materials. Despite all this, China had still proposed negotiations with the United States in virtue of saving itself from making a loss from the imposed tariffs, regardless of the fact that the US only imports a very small percentage of its steel and aluminium from China. In fact, China has also stated that it is ready to ‘make a fierce counter strike’ — such as the $3 billion imposition of tariffs on US fruits, nuts, wine and pork.

Ultimately, the political motif manifested in these tariffs may be fighting a losing battle, as may be seen from the abrupt exemptions that the Trump Administration allowed in the last moments before the tariffs took effect. In fact, such exemptions are being brought into question as a little more than half of the United States’ trading partners seem to be excused from these tariffs, leading to a sense of uncertainty on whether these will actually make a difference in the long run.

Written by

Jurgen Micallef

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