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Arno Lawrenz

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Who needs enemies when you’ve got friends like the US?

01 Jun 2018
EU and Canada steel themselves for a trade fight after news breaks of US tariffs on steel and aluminium.

It was in March 2018 that the Trump Administration announced that for national security reasons, tariffs would be levied on imports of steel and aluminium. [See Robert Lea’s article March 2018] Given that the largest steel exporters into the US are Canada and the EU, it would appear that the Administration is picking a fight with two of its largest political and economic allies.  Whilst Trump appears intent on promoting the idea of national interests as being at the heart of the decision, it does increasingly appear as if it is playing more to the Trump agenda than anything else.

It may seem strange to think then of the recent appointment of John Bolton as National Security Advisor as the harbinger of the new hardline approach to global politics that the US appears to be taking.  Note how since his arrival, the US has pushed forward with the shift in its Israeli embassy to Jerusalem; they announced a seven year ban on US companies selling technology to ZTE, one of China’s largest tech companies; they exited the Iran nuclear deal and they also pulled out of the proposed North Korea-USA summit.  On top of these recent aggressive shifts, including the proposed steel and aluminium tariff announcements, are the ongoing NAFTA re-negotiations, the pulling out of the Trans-Pacific Partnership and the Paris Climate Accord.

The ‘golden thread’ of these actions appear be a deliberate strategic attempt to manipulate for geo-political advantage – in particular as a response to growing Chinese global economic and political influence. [See Craig Farley’s article April 2018] The metal tariff proposals most likely point towards a desire by the US to create a realignment of political and economic incentives in their favour.  After all, Trump’s election manifesto did point to a new vision of “America First.”  The most recent actions starkly reinforce this.

Investment implications from a multi-asset perspective of US steel and aluminum tariffs

  • In the short run, additional tariffs on trade goods implies higher prices, and, coming on the back of already tight labour markets, increases the likelihood of higher inflationary prints, which is not good news for global bond yields.
  • The underlying rationale for the protectionist stance that the US is now favouring is that of overcapacity in many segments of the economy – in this case, the iron and steel industry - with the long-term outcome of falling prices at some point, unless global growth is shifted to a new higher paradigm to eliminate the overcapacity.
  • We are likely to see continued equity market jitters as a number of markets are at reasonably high valuation levels underpinned by high earnings growth assumptions, and these assumptions may have to be tempered downwards as a result of a protracted round of protectionist tariff increases.