US President Donald Trump may have just got the memo on steel. His tariffs are now largely inconsequential, due to exemptions given to Canada and Mexico, two of the biggest exporters of steel to the US.
Earlier this week, Market Exclusive reported that contrary to Trump’s previous rhetoric blaming China for steel dumping – meaning government subsidy of their steel industry in order to sell steel to American companies at cheaper than market prices – China actually has very little to do with it. China isn’t even in the top 10 exporters of steel to the US.
Why did the Trump administration, after threatening no exemptions before deciding to implement the tariffs, apply exemptions at the last minute to Canada and Mexico? Simple. Because Canada and Mexico account for 90% of US steel exports. Impose any significant tariffs on those two countries and they would certainly retaliate, making US steel exports much more difficult. On net, this would probably end up making the trade balance even worse, which is the very opposite of what Trump wants.
The main country that will be affected by these tariffs then is Brazil, the second biggest exporter of steel to the US. Assuming the trade deficit matters, itself a rather debatable point, focusing a steel tariff on Brazil could upset the US trade deficit even further. Why? Because Brazil is one of the few countries with which the US has a trade surplus, approximately $22B in 2016.
Now that these tariffs are focused almost exclusively on Brazil, the Brazilians are likely to retaliate against the US. Why? Because they can use the same logic that Trump is using in implementing tariffs in the first place. If Brazil has a $22B trade deficit with the US, then they have a right, according to Trump’s logic, to impose tariffs until that trade balance evens out. Why should the US have a right to tariff other countries in order to balance their own trade deficits but other countries have no right to tariff the US in order to balance theirs?
Taking Trump’s logic to the extreme, every country should aim for a completely balanced current account in trade. This is what leads to global stability according to such thinking.
The larger implication though is that even the trade hawks within the Trump Administration such as Wilbur Ross and Peter Navarro are not as hawkish as they are made out to be. Even they seem to be afraid of instituting tariffs against very consequential trading partners such as Canada and Mexico, which means, in effect, that any trade policy that really would affect trade balances in a significant way will likely be eschewed. The exemptions given to Canada and Mexico, by making the new steel tariffs effectively defanged, mean that all this trade rhetoric is mostly just that. Rhetoric.
What can investors expect then from future tariffs, which the Trump Administration has indicated are indeed coming? If these exemptions have indeed set a precedent, expect strong words out of the White House regarding unfair trade practices, but in terms of practicality, no tariffs against markets in which the US has heavy exports will be affected much.
In other words, if country X imports product Y from the US in significant quantities, it is safe to assume from now on that country X will be exempt from any tariffs on product Y. This way, trade hawks can be content with rhetoric around tariffs raised, without having too much of an affect on the trade deficit at all.
The ball is now in Brazil’s court for the next shot in this now escalating trade war, so far being fought with mostly blank bullets. Let’s see what the Brazilians do in response.