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The Trade War

03/12/2018 By

Adobe Stock

Spend Matters welcomes this guest post from Michael Liberty, market analyst at Mintec.

While the U.S. and Russia have been imposing tariffs on each other since the annex of Crimea in 2014, the U.S. now finds itself bickering with one of its major partners, the E.U.

While the U.S. is not directly trying to affect the E.U. market, the implications of it increasing tariffs on aluminum and steel imports will be felt worldwide.

This actually began in April 2017, when President Trump launched the Section 232 investigation. The investigation was set up to determine whether lower aluminium and steel prices from China was a risk to national security via the closure of U.S. domestic steel and aluminium smelters.

With backing from Trump, a rise in U.S. import tariffs will allow him to deliver on his campaign promise of protecting U.S. jobs, gaining much needed support as he approaches the half way point in his term of office. It is clear the U.S. is willing to risk ruffling a few feathers to achieve its goals — the Paris Agreement last year being one example — but would a trade war with the E.U. be a battle the U.S. can’t win?

At the start of March, Trump imposed a 25% increase in steel tariffs and a 10% increase on aluminum. The E.U. has responded by threatening to increase tariffs on major U.S. exports — namely Levi jeans, Jack Daniels whiskey and Harley-Davidson motorcycles.

While these threats from the E.U. are a drop in the approximate $500 billion bucket the U.S. exports to the E.U., they have the potential to spiral out of control if Trump retaliates with further protectionist measures.

The main concern for the E.U. market should not be the U.S., but who will absorb the excess metal supply from China set to flood the global market? China has actually been reducing its steel and aluminum output to reduce its reliance on Western demand while also cutting its pollution in major cities.

Over the past week, aluminum stocks on the LME have risen almost 25%, suggesting the market thinks the EU may add protectionist tariffs of its own.

Even though the tariffs were meant to weaken the US’s reliance on China, a trade war between the E.U. and the U.S. would likely turn into a positive for both China and Russia — oh, the irony!