President Donald Trump’s decision to impose tariffs on US imports of steel and aluminium has reignited fears of trade protectionism and triggered volatilities in global financial markets.
The latest move to put 25 per cent on steel and 10 per cent levies on aluminium imports has come after specific measures against imports of Chinese solar panels and washing machines earlier in the year, suggesting that Trump is getting serious about trade protectionism.
But contrary to previous episodes, the global market has reacted with more concern this time.
We think this partly reflects the fact that Trump is no longer making empty threats, but turning hawkish rhetoric into actions.
In addition, the scope of his latest move is more far-reaching, with targets of the tariffs ranging from “strategic competitors” such as China and Russia, to traditional allies such as the EU, South Korea and Japan. Even though Canada and Mexico are initially exempted, Trump has threatened to claw them back in if they fail to treat the US “fairly” in future Nafta re-negotiations.
The fact that Trump is no longer picking a fight with just China, but the rest of the world, hints at rising risks of global retaliatory backlash. Threats from the EU for a tit-for-tat response are ominous signs of what could be laying ahead for global trade.
It is these worrying turns of events that, in our view, have led the market to reassess the chance of a global trade war.
As for the real economy, the tariffs imposed so far should have a limited impact. Steel and aluminium imports are not major contributors to the US trade deficits, accounting for merely 2.5 per cent and 0.5 per cent of the total in 2016. Hence, even if Trump is successful in eradicating deficits in the two sectors, the contribution to the overall trade balance should be small.
And for whatever the “benefits” it extracts from the tariffs, the US will have to balance them with costs. The sizeable levy imposed on steel and aluminium products will lead to a higher cost of production for downstream manufacturers. The 2002/03 steel tariffs under the Bush administration, for example, raised import prices by more than 3 per cent at the time.
Higher domestic inflation may force the US Fed to raise interest rates more aggressively and cause the dollar to appreciate. An overall tighter monetary condition may harm the US economy and undermine market confidence.
Trump will also have to shoulder the potential diplomatic backlash, as many of the US’s allies, targeted by the tariffs, have expressed “deep concerns” by the disturbing trend of protectionism.
As for China, given that the US market accounts for only 6 per cent of total steel and aluminium shipment, which is in turn only 3 per cent of China’s overall goods exports for 2017, the direct impact of the tariffs will be negligible for the economy.
But the risk of more substantial trade disputes is on the rise. The ongoing Section 301 investigation on China’s transfer of US technology and intellectual property could be concluded as early as April. If China is found guilty of infringement, the subsequent punishments from the US could inflict more pain on the Chinese economy.
Together with possible retaliations, the Sino-US economic relations could worsen to the extent that it leads to catastrophic consequences for the world.
That is clearly a path that Beijing does not want to go down. Hence, President Xi has tried to manage the relationship by pursuing more diplomacy and dialogues. Two high-ranking Chinese officials, Liu He and Yang Jiechi, were sent to Washington over the past month to iron out differences, and more discussions are expected in Beijing over the coming weeks.
China has also tried to offer trade reciprocations by recently removing import duties on US broiler chicken and promised to buy more US energy products. Sinopec, a large state-owned petrochemical company, is said to raise its imports of US crude oil by 80 per cent this year.
Finally, Premier Li Keqiang, at his opening remark to the National People’s Congress, has pledged to further open up the Chinese market for foreign investment, in areas – such as financial services, health care and electric vehicles – where American companies have a comparative advantage.
Whether these concessions from Beijing are enough to reduce Sino-US trade tensions is yet to be seen. But at least one side is showing efforts to resolve the bilateral imbalance in an orderly fashion.
We still discount an all-out trade war as a low-probability event, but the chance of more targeted disputes is clearly on the rise.
The looming midterm elections in the US could give protectionism a political boost, as Trump tries to rally supports of his constituencies. The market has started to reprice such a risk, and a continuation of this process could, in our view, contribute to rising market volatility from here.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers