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Trump Import Tariffs Will Have The Exact Opposite Effect

Katchum profile picture


  • Trump plans to impose import tariffs on steel (25%) and aluminum (10%).
  • Steel and aluminum prices will go up, benefitting domestic producers, but hurting domestic manufacturers.
  • U.S. deficit will increase along with a depreciating U.S. dollar.
  • GDP growth will slow down due to a trade war and put pressure on the stock market.

In a previous article I mentioned that the U.S. deficit was going to spiral out of control and that inflationary pressures will emerge, putting pressure on the U.S. dollar. Well, it just got worse with the news that Trump is going to impose import tariffs on steel (25%) and aluminum (10%). I will make the case that this will only increase U.S. deficits and be detrimental to GDP growth.

When import tariffs are imposed, basic economics tells us that in all cases, the price of the good will increase. Foreigners will sell less of the good to the U.S and domestic production of the good will increase.

In theory, following countries will be significantly impacted by the tariffs (see first figure below from IHS Global Trade Atlas and second figure below from IHS). It looks like Canada will be the hardest hit.

In reality though, U.S. steel and aluminum producers will not ramp up production overnight. First of all they are not sure that these Trump import tariffs will be imposed indefinitely, so they have no incentive to build new production plants due to this uncertainty. Second, even if they wanted to increase production, there will be a delay of several years before this supply imbalance (due to the import tariffs) is resolved. They will just increase the prices of steel and aluminum in the meantime.

So what happens in practice is that steel and aluminum prices are going to rise. U.S. steel and aluminum producers will benefit from this (Alcoa (AA), U.S. Steel Corp. (X), etc.), but companies that use steel and aluminum (e.g. General Motors (GM), Boeing (BA), Ford (F), Whirlpool (WHR), etc.) will see their costs rising. These companies have two choices: either increase the price of their finished

This article was written by

Katchum profile picture
Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a competitor of Dow Chemical. Today, he works as a regulatory compliance consultant at J&J, but his real passion will stay in macro-economics. His experience in the chemical and pharmaceutical industry allows him to monitor the economy from a process engineering standpoint, analyzing macro-economic charts, correlations and trends.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Civilization Type 1 profile picture
One thing that occurred to me today was that this measure might actually accelerate the migration of some production to Mexico or China or elsewhere. Take the recently announced Toyota-Mazda plant planned for Huntsville, AL. I'm wondering if, in some cases at least, consumers of steel might actually decide it's not worth it producing in the US anymore because of the high price of steel, and decide to locate elsewhere. Could this raise the price of steel so high that, say, Toyota and Mazda decide it's not worth it to build the plant in the US and decide to locate it in Mexico? After all, they'll have lower tariffs on importation of cars from Mexico than tariffs on importation of steel from Canada or Brazil (at least for the time being). Maybe Whirlpool will decide that buying steel in the US has become too expensive, so they close down a plant or two and move shop to Mexico. Would be pretty ironic!
Katchum profile picture
That's exactly what will happen.

For example:
Sweden's Electrolux said it would delay a planned $250 million investment in Tennessee.
Civilization Type 1 profile picture
Thanks for the info!
Fish; Right now the U.S. is involved in 77 conflicts (read: wars) across the planet. Perhaps you can enlighten us as to what "machines" we need to "rebuild" that are presently in disrepair. Most of the steel we import is from Canada and Mexico, both of which the State Department has identified as strategic partners.
fishfryer profile picture
The U.S. does not have the capacity at this time to rebuild the machines we need to wage war if need be. If steel and aluminum are blockaded by physical or political means, we run out of those goods during the time we need them most. This move by trump is to gently wake up our own supply chain and give our industry some reason to expand.
Ben Gee profile picture
Tariffs will do a lot more harm than good.
Agree 100% with the conceptual framework and conclusions. However, it would help to explain a couple of things:

The focus here is the two US tariffs announced, steel and aluminum, anything else is speculation. From the analysis of steel and aluminum import sources that is provided here, it appears China is not a factor - or not a material factor. Setting aside the trade consequences vis-à-vis those countries named - which is a big enough problem - what is the concern vis-à-vis China, or even Europe - also not a significant source of the metals per the data provided here? I can see bringing China and Europe into the argument if tariffs are expanded to goods they send us, but that's not what we are talking about here.

Also, does anyone know, yet, if these tariffs will apply to the raw bulk steel and aluminum (as in ingots) or will it apply to fabricated products only or both?

Bottom line, as to the tariff issue, while the theories presented above are correct and supportable, I think what we have here may be more along the lines of negotiating chips than actual implementation of tariff's, so let's not put the cart before the horse as far as predicting bad things - yet.

As to the Debt to GDP charts, it's kind of interesting to note that the chart for Germany starts 20 years ago while the US chart starts 70 years ago. Also interesting to note that, in the case of Germany, the big divergence came post FC, at a time when the US greatly increased its deficits for a variety of reasons. Germany actually benefitted from that - and they benefitted from the structural framework of the EU, as in its consolidation of the currency without the consolidation of debt across EU members.

Finally, as to China, one of the issues that has been brought up elsewhere is that a large amount of steel and aluminum imports from places like Mexico and even Canada is made up of transshipments originating in China. If true, it would be interesting to know how much of the pie(s) that comprises.
Do Europe, Mexico and China have import tariffs on US autos?have tariffs on
Katchum profile picture
Yes, all countries have tariffs on each other. What I'm just worried about is the inverted duty structure, because steel is a raw material and if the tariff on a raw material is higher than the tariff of the finished product, then you will put the manufacturer out of business.
Katchum profile picture
For example: Trump imposed an import tariff on Whirlpool washing machines of 20%, but the steel import tariff is 25%. I wonder what will happen to Whirlpool.
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