Economic and Financial Market developments
US tariffs: The US dollar slumped and sharemarkets fell in response to news on proposed tariffs.
What happened?
- US President Donald Trump has indicated that he will impose a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminium imports.
How did the financial markets react? - The Dow Jones fell by 420 points or 1.7 per cent after trading in a 743 point range. The US dollar fell against major currencies with the US dollar index down by 0.7 per cent. The Aussie dollar rose by around half a US cent. Asian sharemarkets have fallen in line with the US market.
Why did markets react this way?
- While President Trump had earlier flagged increases in tariffs, the timing of the announcement came as a surprise. Tariffs are effectively taxes on imports. The President hopes that by lifting tariffs that the US steel industry will be protected from foreign competitors – saving or creating jobs and potentially boosting investment. The concern is that the President doesn’t stop there and looks to lift other tariffs. The risk is that other countries may retaliate by also lifting tariffs, causing a slowdown in global trade and economic growth. US businesses that use foreign steel and/or aluminium will have to either absorb the higher cost (affecting profits) or lift prices, boosting inflation and leading to higher costs for consumers. For example, the lift in tariffs could lead to higher car prices.
How important is the US steel industry?
- The US is the world’s largest steel importer, importing around 30 million tons of steel a year. Imports account for a third of US consumption. The US imports steel from 110 countries with the top three import sources being Canada, Brazil and South America. The top 10 sources of imports account for 78 per cent of total imports. China is 11th ranked and imports from China fell over the past year. https://www.trade.gov/steel/countries/pdfs/imports-us.pdf
What’s next?
- The decision to lift tariffs has not yet been formalised – President Trump plans to sign it into law next week. So it is possible that the decision could be watered down or postponed. Certainly Republican House Speaker Paul Ryan is hoping for another way to meet the objective of supporting the US steel industry.
- While it is important not to be complacent, the responses to date suggest that a global tariff war can be avoided. Governments are more aware that any purported gains from lifting tariffs are offset by losses elsewhere, leading to net losses for economies. President Trump was elected by promising to “make America great again”, supporting local businesses and industries from supposedly unfair foreign competitors. Despite vocal opposition from economists and law makers, the issue of protectionism in the US will remain in focus over 2018.