Global equity markets retreated when the Trump administration announced its decision to impose 25 per cent tariffs on imported steel and 10 per cent tariffs on aluminium to protect US jobs in those industries.
While the final act has not yet been signed off, the prospect of Trump putting ‘America-first’ protectionism back on the table has investors wary of heightened volatility and the potential impact on global trade. The market reaction to the news illustrates that US trade policy, far from disappearing off the agenda, may well become a more prominent issue in the coming months, with implications for investors’ equity and bond portfolios.
While US domestic steel and aluminium stocks rose on the announcement, companies that use steel and aluminium took a big hit on fears higher costs of the raw materials will either hurt sales (if they are passed onto consumers) or eat into profits (if companies cannot pass along the higher costs). Shares of automakers such as General Motors fell, while construction equipment maker Caterpillar dropped around 3 per cent. Many beverage companies that use aluminium cans also took a hit.
Investors fear tariffs would not only lead to rising costs for manufacturers that use steel and aluminium, but also trigger a global trade war that raises prices on consumers in general – which in turn would slow economic growth. The current main risk to the outlook lies in the response of US trading partners and whether the administration’s decision to impose restrictive trade policies is only the first in a series of moves.
As an example, reported fears that the US president was about to pull the plug on Nafta sparked volatility in currency markets. Foreign exchange analysts recommended the sale of the Mexican peso and Canadian dollar. The US dollar also dropped on a Bloomberg report that China, mindful of potential US tariff moves on steel and aluminium imports, may reduce its Treasury holdings.
The counter argument is that common sense should prevail. China is the ‘global manufacturer in chief’ and the US receives capital from China to finance its trade deficit. Emerging markets investors also have last year’s experience of Trump rhetoric to give them comfort – there is a lot of talk and tweets, but actions are limited by the Congress and Republican party. Unsurprisingly, Trump excluded Canada and Mexico (the two largest exporters of steel to the US) from the imposed tariffs.
In early 2002, then President George W Bush imposed similar steel tariffs of up to 30 percent on imports of steel in an effort to shore up domestic producers against low-cost imports. Those tariffs caused steel prices to surge, costing more jobs in steel-using industries (such as automakers and brewers) than then existed in steel-making. Auto-parts manufacturers left the US so they could make their parts with cheaper steel and then ship them back to the US — cutting jobs for American workers while also avoiding tariffs. Researchers found there were 10 times as many people in steel-using industries as there were in steel-producing industries.
The EU and Japan challenged the action with the World Trade Organisation, which ultimately decided the tariffs did not conform with global rules. Facing retaliation from the European Union and others, Bush removed the tariffs after just 18 months instead of having them in place for three years as he had wanted.
It is also a reminder of the odd relationship between protectionism and the stock market. Canto, Dietrich, Jain and Mudaliar already analysed that connection back in 1986, after 15 years of US protectionism.
They concluded: “Investment managers should know the magnitude of movements in equity values associated with the imposition of trade restrictions. Empirical results suggest that across-the-board protectionist policies are associated with a decline in the S&P 500. In addition, examination of four industries that received specific trade protection shows that, in all four cases, imposition of the protectionist measure was associated with a decline in [market capitalisation]”.
Charles Younes is research manager of FE
