If A Trade War Is Coming, Are We Ready?
President Trump announced that his is planning to impose a 25% tariff on imported steel and a 10% tariff on imported aluminum. This news rattled the markets – the S&P fell 1.4% while the Dow shed 1.5% – and had many talking about the renewed possibility of a trade war.
Why is Trump raising tariffs on steel and aluminum?
The President has said that he wants these tariffs to protect the US steel industry and correct the trade imbalance that we run with many metal exporting countries. The President believes America runs trade deficits with countries like China and Germany because these countries are taking advantage of us, and he believes higher barriers to trade will protect US industries and reduce these trade deficits. He then tweeted that for the United States a trade war is “good” and “easy to win.”
Let’s start with the basics first. What is a trade war?
A trade war is the tit-for-tat raising of trade barriers – import dutys, tariffs, or increased domestic subsidies – between countries. This makes imported goods harder to import and less competitive in the recipient country. These actions tend to slow business activity and therefore economic growth around the world. A great example if this is the Great Depression. Protectionist trade policies made that economic downturn much deeper and longer.
What can we expect to happen?
In the short term, the steel and aluminum industries could certainly benefit. The stock price of US Steel jumped nearly 5% when the President floated these topics. But the US stock market lost hundreds of billions in value, fueled by fear of a trade war. There are a few reasons for this reaction. First, individual Americans and businesses will be left holding the bill.
Higher prices for steel and aluminum mean that everything from foil to Fords are likely to get more expensive. Second, American businesses are going to face a more difficult business environment around the world. If other countries retaliate, companies that export products are going to suffer. U.S. businesses export $2.3 trillion in goods and services to other countries every year. Any reduction in that amount will hurt U.S. firms and their employees.
What reactions have we seen from countries around the world?
We have seen threats of retaliatory measure come in from around the world. The President of the European Union has threatened to slap tariffs on products like Harley-Davidsons, Kentucky bourbon and blue jeans, American products made in the home states of key Republican leaders. In Britain, Canada, Australia and China, officials expressed concern and noted that they are also looking at punitive measures.