Control Risks says a G20 agreement is the likely outcome retaining as much of the ‘global financial architecture’ as possible.
Trump’s claim that the US has an $800 billion global trade deficit is misleading. The US did indeed have a global trade deficit in goods of $810 billion in 2017, according to the US Department of Commerce, but it also had a healthy surplus in services. When taken into account this means that the US actually had an overall global trade deficit in goods and services of $566 billion last year.
US imposes aluminium and steel trade tariffs on allies
The US imposed trade tariffs on steel and aluminium being imported into the country in March. However, its overseas allies in the EU and continental neighbours such as Canada and Mexico had been exempt, as the US attempted to target China.
The country has been reviewing its decision to temporarily exempt its allies from the trade tariffs on a monthly basis, and following the latest review it has decided that these exclusions are no longer warranted, expanding the 25% levy on steel and 10% levy on aluminium to cover its allies.
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The US is justifying its decision on national security grounds and Trump, looking at the tens of thousands of steel and aluminium jobs that have vanished across his beloved Rust Belt over the years, doesn’t like the trade imbalance that sees the US import about four times more steel than it exports.
Learn more about how a trade war will affect metals price
The US claims to be the biggest importer of steel in the world, accounting for about 8% of all global imports, although the amount the country imports is still below its peak from 2014. The top sources of US imported steel, according to US trade data, are: Canada (17%), Brazil (14%), South Korea (10%), Mexico (9%), Russia (8%), Turkey (6%), Japan (5%), Germany (4%), Taiwan (3%), and China (2%).
US-China trade war: one step forward, two steps back
Trump’s current campaign on global trade initially started with his dispute with China, and his steel and aluminium tariffs introduced in March were targeting President Xi’s country. In a nutshell, the US is unhappy with the $375 billion trade deficit it has with China, the laws restricting US firms from investing or entering into the Chinese market, and China’s demand that foreign firms share their technology and intellectual property (IP) in order to get a foot in the country.
The US has threatened on several occasions to slap fresh tariffs on Chinese goods and China has offered to respond in kind. But this back and forth is part of the wider game, as the two countries hold trade talks which are expected to continue throughout the summer.
Trump’s visit to Beijing in November saw the pair strike a $43 billion deal for state-owned Sinopec to invest and buy liquefied natural gas from a project in Alaska, and more recent talks saw the pair make progress on more deals in the agricultural and energy sectors, with the US claiming that the trade war with China was on ‘hold’.
The situation looked to have reached a new stage, one progressing through negotiation rather than threats. China had agreed to buy more US goods and said it was relaxing foreign investment rules in key sectors like transport and agriculture. But as China opened its doors to negotiations over one demand, such as the US request to cut its trade deficit with China by $100 billion, Trump doubled-down, demanding that China helped cut the deficit by $200 billion.
Find out more about how a US-China trade war could impact markets
Tensions have since quickly escalated. The latest round of talks yielded no deals, and the pair did not make a joint announcement as they had done after previous and seemingly more successful meetings. Instead, Trump issued a surprise announcement that the US was going ahead with tariffs on $50 billion worth of Chinese products, mostly industrial goods, with a list to be released shortly.
China has vowed to retaliate with its own trade tariffs on US goods and has claimed that any deals agreed to date, such as the Alaskan liquified natural gas project or relaxing foreign investment rules, will be void if Trump pushes ahead with trade tariffs.
Trump vs the world: US slaps trade tariffs on allies
The trade tariffs on steel and aluminium imported into the US from countries like Canada, Mexico and the EU have become effective immediately. The surprise decision has sparked a backlash from world leaders and the timing cannot be ignored, being announced just before the G7 meeting in June 2018.
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Finance ministers have already met ahead of world leaders convening, and a published summary stated that ‘the tariffs imposed by the United States on its friends and allies, on the grounds of national security, undermine open trade and confidence in the global economy’.
Here is a breakdown of what the trade tariffs mean for America’s partners, and how they have responded:
US-Canada trade war
Demonstrating the surprise of Trump’s decision – Canada and the US are now in a trade war. These two countries are close partners in trade, security and just about everything else but, with Canadian President Justin Trudeau slamming the tariffs as ‘totally unacceptable’ and launching duties on about $12.8 billion worth of US goods, the pair are now in unprecedented waters.
Canada has good reason to be angry, claiming the tariffs to be an ‘affront to the long standing security partnership between Canada and the United States’. The top ten sources of US imported steel has fluctuated over time, but Canada has retained the top spot throughout.
Importantly, this comes at a time when the North American Free Trade Agreement (NAFTA) is still up in the air as Canada, the US and Mexico continue to renegotiate the terms, with Trump again tackling what he sees as an unfair deal. Still, those leading the negotiations from Canada and Mexico have both stated since that they consider the tariffs on steel and aluminium imports to be a separate matter, and not one that will derail the progression being made.
Latin America offers mixed response to US trade tariffs
America’s southern neighbour, already peeved by the increasingly hostile relationship with the US and peering over prototype walls on the border, has also threatened to retaliate. Mexico is reportedly looking to target US agricultural goods like pork and fruit.
Other Latin American nations have provided a more conciliatory approach. Countries like Brazil and Argentina (and Australia) have offered to reduce the amount of steel they ship to the US if they can be excluded from the tariffs. Together these three countries represent a tiny proportion of overall steel imports into the US, but they are growing markets. Brazil is one of the fastest growing markets for US imported steel, for example.
European Union takes hard-line stance on Trump trade tariffs
The challenges are only growing for the EU. Aside from the likes of Brexit and the political strife in Italy, the EU now has a looming trade war with the US on its hands, and one that will further test the bloc’s ability to put on a united front.
Read more about how the eurozone’s optimism has returned as the Italian crisis fades
The EU describes the tariffs as unfair and prompts a rebalancing of EU-US trade. The retaliatory tariffs will target those industries key to Trump’s support base, products like bourbon whiskey (Kentucky), Harley Davidson motorcycles (assembled in Missouri, Pennsylvania and Wisconsin), orange juice (Florida), cigarettes (North Carolina, Kentucky and Virginia), sweetcorn (Iowa, Illinois, Nebraska) and peanut butter (Georgia, Texas, Alabama).
The EU has also said that it will implement measures to protect from the possible floods of steel that could enter the bloc’s market as shipments are diverted away from the US, or from an over-supply as producers try to find a market for steel that it can no longer export. The EU is not alone in its fears, with countries like Indonesia and Vietnam also reporting concerns that swathes of ships destined for the US could divert and dump steel in their markets.
While Canada and Mexico scratch their heads as to why Trump has imposed tariffs when NAFTA talks are ongoing, the EU is too bewildered as to why he is targeting them and at the same time trying to convince them to liberalise trade with the US. European trade commissioner Cecilia Malmstrom reportedly said they had ‘closed the door’ to these talks with the US. The initial exemptions suggested Trump was seeking to gain support from the EU and others in its trade war against China. Now it seems Trump wants to provoke a renegotiation of every trade deal the US has with everyone.
Still, the EU realises that the threat China poses is still very real. It has pushed ahead with lodging a case against China with the World Trade Organisation (WTO), with one against the US to soon follow (to protect its IP) sharing concerns about the amount of tech being leaked to Chinese firms. Showing a united front when you’re anything but is the EU’s top skill.
Trump whisperer Macron makes France key EU state in trade spat
French President Emmanuel Macron, dubbed the ‘Trump whisperer’ due to his ability to get through to the US president, will be the key EU leader in determining how the current trade dispute unravels, and whether it remains a trade spat or a trade war.
Macron has called Trump’s decision illegal and a mistake, implying that the French leader is looking to take a hard-line stance against the US president. However, Macron has also offered a carrot as well as a stick, offering to assist Trump in ironing out some of the imbalances in world trade by reducing overcapacity, regulating subsidies and (remembering China) making a better effort to protect IP.
Germany likely to be a calming voice as EU prepares retaliation to US trade tariffs
Germany, the second part of the duo that leads the EU, faces a tougher time when it comes to Trump’s trade tariffs.
Chancellor Angela Merkel’s position was weakened in the most recent elections, the country is the only EU member that exports a notable amount of steel to the US, and Trump is threatening to impose tariffs on cars imported to the US, threatening the automotive market. Trump has warned he is looking to introduce tariffs on car imports on the same grounds as the steel and aluminium tariffs: national security. This will put pressure on Merkel from an industry that is already disgruntled over Brexit. Germany is also the second largest importer of steel, making it vulnerable to any potential steel that is dumped in the EU as a result of Trump’s decision.
This means Germany is likely to use its power to provide a calming voice in response to the trade tariffs, possibly setting the country on course to collide with stronger views emitting from partners like France to test the bloc’s ability to put on a united front.
Another dent in the battered UK steel industry and more Brexit uncertainty
On the topic of united fronts, the US trade tariffs provide another blow at a crucial moment for the UK. Brexit negotiations are supposed to start coming to a close by October and losing the benefits of the ‘special’ US-UK relationship at a time when the US is arguing that it is better off negotiating trade deals with other countries is far from ideal. It simply reinforces that at best, the US plans to treat the UK the same as its larger EU neighbour, and demonstrates the benefits of arguing as a bloc compared to an individual island. It is safe to say the trade tariffs have not helped install confidence that any UK-US trade deal will be struck post-Brexit.
The UK steel industry has already had a tough few years, and the trade tariffs represent a severe blow to the sector. Trade industry body UK Steel has stated that the tariffs will hit about £360 million worth of exports per year, with about 10% of all UK steel exports destined for the US. If Trump follows through on his threat to impose tariffs on motors then the UK will also be a significant casualty, as this too is another major export market for UK car manufacturers.
Read more about how Brexit could impact the UK automative industry
Still, with the UK keen to keep relations on track, it has said it is looking to continue talks with the US in the hope of gaining a permanent exemption from the tariffs.
The global trade war is about much more than trade imbalances
While Trump seems to be on a mission dedicated to addressing deficits and delivering his ‘America First’ policy by bringing back jobs and industry to the US, the global trade war that is brewing is about much more than addressing statistics and reviving steel and aluminium production in the Rust Belt.
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The trade tariffs come at a time when Trump is looking to reform US trade around the world, but whether or not it helps his cause when it comes to the likes of NAFTA, EU trade liberalisation talks or secure support from its international partners (amid delicate political tensions with countries like Iran and North Korea) is still unknown. While the hard-line response from Canada and stern threats from the EU have kick-started a tit-for-tat with the US, the other option would have been to let Trump’s decision go unpunished.
Read more about how the US and North Korea impact markets
The fight with China centres on a much more long-term aim, one that China has been working toward for decades (at the detriment of the US and its other western powers) and one that the US is now urgently seeking to address. China has long been accumulating technology from advanced economies by forcing foreign companies to share IP in return for being allowed to operate there, insisting they form a joint venture with a Chinese firm. IP accounts for 30% of all services exported out of the US around the world, and Trump fears far too much US-owned IP is leaking to Chinese firms, as do the EU and others.
This is at the heart of Trump’s fight with China because it is a fight over who will control the next era of international development, a fight over who will lead the development of the next waves in technology such as artificial intelligence, the Internet of things and 5G, which are all sectors that China invest in heavily both home and abroad. This is why the US and others want a level playing field when it comes to foreign investment with China, and are so against the country’s laws that give China the ability to take foreign tech, develop it, and then keep it to gain an edge over its competition. US Treasury Secretary Steven Mnuchin has shown that the US is more concerned with structural changes than convincing the Chinese to buy more US goods. Allowing US companies to compete more fairly would, according to Mnuchin, ‘deal with the trade deficit alone’.
Having said that, Trump’s ambition to return metal manufacturing jobs to the US is at odds with this, promoting industries that, although still integral, are not featured at the heart of any future world economy. But Trump has proven his commitment to his campaign promises, one of which was to reinvigorate the dying steel and aluminium industries. But restoring this is not simply done by targeting foreign production. If there is not ample competition in the domestic market then it could lead to lower quality, more expensive steel for the US.
Trump’s decision is also reinforcing the perception that China is increasingly emerging as the new world leader of global trade at a time when he is implementing imposing protectionist measures and turning his attention inward. But it could be argued that the US is not abandoning its post as the world leader, it is leveraging it.