The Beginning of a New Era of Trade Wars ?

Trade Wars

Last week on Thursday President Donald Trump announced his plans to introduce a 25% tariff on imported steel and 10% tariff on imported aluminium. This move has sent shock waves across the world. Financial markets reacted negatively in the US and in Asia. Countries were quick to respond with potential retaliatory measures. Many international leaders such as Canadian Prime Minister Justin Trudeau are said to have called the president. The US Congress has also come out cautioning the president against this move.

Prelude to the announcement

Measures such as tariffs are taken after a lot of deliberations. Last year, President Trump asked Secretary of Commerce Wilbur Ross to look into the import deficit in steel and aluminium. Secretary Ross submitted his findings in January this year. On Thursday, President Trump invited members of the steel industry and the preference indicated was that of tariffs over quotas. These tariffs are on tariffs with no country exemptions. However, there could be exclusions based on whatever criteria is outlined.
The Steel industry has been in a state of decline for the past few decades. The number of steel manufacturers have dwindled down to a handful who are focused primarily on defence use. All this while the US has been the biggest importer of steel in the world at about 35.6 million tonnes in 2017.

Response from within Trump administration

Response from those in the administration and within congress have been mixed. Paul Ryan, Speaker of the United States House of Representatives, came out against this measure stating that a more ‘surgical’ approach is required. The Trump administration saw another exit with Chief Economic Advisor Gary Cohn resigning on Tuesday over the tariffs. On the other hand, Secretary of Commerce Wilbur Ross and Director of Trade and Industrial Policy, Peter Navarro have been on various shows talking about the move and trying to gather support.
The stock markets also haven’t responded positively. In the US, The Dow dropped around 1.7%, S&P500 and Nasdaq closed around 1.3% lower following the announcement. Stock markets in Asia also opened red the next day.

Leaders across the globe express concerns over the move

The response from nations around the world wasn’t welcoming. For the past few decades, the world has been moving towards globalization and supply chains have become largely worldwide. Countries have steadily been moving towards free trade with numerous bilateral and multilateral agreements being signed.
Canada is the biggest exporter of steel to the US at 16.7% followed by Brazil (13.2), South Korea (9.7) and Mexico (9.4). The Canadian Prime Minister was quick to react once the move started being concretized. Canada, US and Mexico have a free trade agreement in place called NAFTA. There are reports that this move could be used as a bargaining chip during the re-negotiations of the agreement. Canada has also threatened to retaliate if this move comes through.
The EU has warned against implementing this policy as well. The European Commission chief Jean-Claude Juncker at a conference the day after the announcement by President Trump said “So now we will also impose import tariffs. This is basically a stupid process, the fact that we have to do this. But we have to do it. We will now impose tariffs on motorcycles, Harley Davidson, on blue jeans, Levis, on Bourbon. We can also do stupid. We also have to be this stupid,”. China, a country lower down on the list of exporters (2.9%) also threatened retaliatory measures.

Impact of the move

The impact of this move is still being worked out. The impact can be classified in two groups. The first is the direct impact on the US economy. Second, retaliatory measures from other countries.
There are statistics coming out from various agencies and economists. As per one estimate the move will add over 33,000 jobs while costing nearly 180,000 jobs downstream. Another estimate puts the job loss count at 146,000. The end result is not good.
In light of the developments, the Director General of the World Trade Organisation (WTO) Roberto Azevedo, while urging “all parties to consider and reflect on this situation very carefully” said, “Once we start down this path, it will be very difficult to reverse direction. An eye for an eye will leave us all blind and the world in deep recession. We must make every effort to avoid the fall of the first dominoes.”
The move is likely to affect India as well. Until recently, India was in a phase where it was a net importer of steel. This trend has only recently reversed. While India accounts for about 2.4% of US imports, the move will impact India. The effects are twofold. The first is of Indian companies losing business. Companies that have exposure to the US market are likely to be directly hit. On the other hand, countries (like South Korea, Russia) that are competitive and are likely to lose out because of this move, could target countries like India to make up for the losses. This could result in excess supply which would affect prices negatively. The steel sector is barely recovering since the changes in commodity prices and NPA problems. This could further push a recovering steel industry into trouble. When Indian markets opened on Monday, metal stocks were trading lower.

Evidently, the total implementation of President’s Trumps move would have larger ramifications on nations across the world and possess the potential to change the idea of interactive trade and liberalized markets altogether.

– Contributed by Bhargav

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