8 March 2018
A trade war between the EU and US, a lose-lose situation

Trade wars are good and easy to win, according to US President Trump, but higher tariffs lead to few winners and many losers. If the current ‘tit for tat’ rhetoric between the US and EU really results in a trade war, neither will walk away scot-free

Tensions between the EU and US have been rising since President Trump announced higher import tariffs on steel and aluminium last Thursday. EU trade commissioner Cecilia Malmström has said that the EU would have to respond and put in place reciprocal tariffs.

The EU has prepared a list of products, if indeed the US were to implement duties, including a 25% tax on a number of steel products, agricultural products and consumer goods. In turn, President Trump said that the US would retaliate by imposing tariffs on European auto sales.

China: Patient on US trade tantrum

The direct impact on China from US steel and aluminium tariffs is likely to be minimal

The first round: Little impact on China

The direct impact on China from this first round of US trade tariffs is likely to be small because China has reduced its steel exports significantly, and is not even among the top 10 steel exporters to the US. While China's aluminium exports to the US constitute around 10% of total aluminium exports, the number is still small compared to China's total exports.

To understand why China is not one of the top steel exporters to the US, we need to emphasise that the country has been cutting steel production capacity since 2015. Exports of steel came down from a peak of 11.2 million tonnes in September 2015 to less than five million tonnes in January 2018. In addition, the government has announced further iron and steel production capacity cuts in 2018. That means China would have exported less steel even without US import tariffs.

To this extent, US import tariffs don't hurt China's steel producers

As for aluminium, China's exports to the US are likely to go somewhere else in the world. As other countries' aluminium exporters would also need to find other buyers, China may end up having more supply domestically, which could mean either Chinese aluminium producers produce less or sell at a lower price or both. So the tariff may hurt some Chinese aluminium exporters but the scale of aluminium exports is small compared to China's total exports.

All in all, the direct impact on China is minimal.

Metals take a hit but aluminium is clueless on tariffs

Base metals suffered losses last week as a slowdown in Chinese manufacturing deflated expectations and the US dollar rose. Although US premiums have surged on section 232, the LME aluminium price traded sideways with markets confused on the global effects. We lean towards a bullish stance

Aluminium premiums surge on section 232

US premiums have surged to 16¢/lb with the CME forward curve pricing in 17¢/lb by the end of the year. On Thursday, President Trump announced he would indeed be imposing a 10% duty on aluminium imports (all types: products and primary). It is worth remembering that prior to the commerce report, the market was largely just expecting duties on fabricated products and perhaps only just those from China. Duties will now clearly be applied more broadly but the all-important details on Canada are still unknown. Canada supplies over 50% of the US imports, with the potential to fill 70%.

Premiums are up 60% year-to-date and whilst a 10% duty supposes around a 10¢/lb premium increase (if Canada is not exempt) it is worth remembering that the market has been pricing in a duty effect for some time. Still, even if we assume around half of the original 7.7% proposed duty was priced as we crossed 13¢/lb, then premiums still have 3-4¢/lb further to run with 20¢/lb in sight.

As the dust settles in months to come, we could well see US premiums come in from these highs. A near-term sell-off could come if Canada gained an exemption but further out it will be important to track developments in freight rates. A bottleneck in trucking drove much of the earlier increase in the premium with Truckstop data showing Midwest rates are up 31% year-on-year. As new rules on electronic logging become commonplace and capacity is added to trucking fleets, premiums can only ease. We also expect more tight backwardations on the LME, which could pressure any customs cleared stockpiles to be sold off into the domestic market. A move which will be all the more tempting at the higher premiums.

US import tariffs on steel and aluminium: Who stands to lose?

President Trump's clear intentions to slap import tariffs on steel and aluminium are causing a stir. A global response could have far-reaching impacts on world trade

America First

Donald Trump's announcement of 25% US import tariffs on steel and 10% on aluminium came earlier than expected, but the latest development in US trade policy is not surprising, following the US exit of the TPP trade agreement and re-negotiation of NAFTA, other policy changes with roots in the protectionist logic of America First.

The tariffs, which have been presented as measures to support domestic industries, are broadly in line with the recommendations made in a report published in February by the US Department of Commerce which found that “the quantities and circumstances” of US imports of aluminium and steel “threaten to impair the national security”. President Trump has chosen to implement tariffs on US imports from all countries, rather than a quota, or a combination of a quota and tariffs for selected countries, and go higher than the report’s recommended tariffs on imports from all countries (24% for steel and 7.7% for aluminium).  

Reading time around 5 minutes

Trade war: What is it good for?

President Trump is today expected to authorise new tariffs on steel and aluminium imports. While the details remain unclear, global trading partners are already considering retaliatory measures, sparking concern about a full-blown trade war. Here's everything you need to know

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