Announcing March 1 that he intends to slap foreign steel producers with a 25% tariff and 10% for aluminum, 71-year-old President Donald Trump said he intends to win the trade battle to save the steel and aluminum industries. Called a risk for a trade war by economist Adam Posen, the former New York Federal Reserve Board member couldn’t see how preserving the U.S. steel and aluminum industry helps the U.S. economy. Accounting for about 1% of U.S. Gross Domestic Product, the steel and aluminum industries have a minor impact on the U.S. economy, compared with business from multiple sources. Like the beleaguered coal industry, Trump campaigned to save the steel and aluminum industries from cheap foreign competition. “This is straight-up stupid,” Posen told CNBC. “This is fundamentally incompetent, corrupt and
misguided,” seeing zero benefit to the U.S. economy.
Protectionist policies can backfire, inviting retaliation from foreign countries, looking to sell into U.S. markets. Trump’s banking on lucrative U.S. markets to carry enough clout to force foreign suppliers to suck-it-up and accept tariffs as the new normal doing business in the U.S. Automakers, airplane manufacturers and other large alliances industries, like Samsung and General Electric, could see manufacturing prices rise soon, expecting retaliation from foreign countries. Energy prices have been steadily rising since Trump took office Jan. 20, 2018, adding to inflationary pressure currently dragging down the economy. While Posen attributes the recent 1,000-point-plus sell-off to Trump’s tariffs, investors’ real concerns have more to do with rising interest rates, something Federal Reserve Board Chairman Jerome Powell could take the Federal Funds rate up a full point in 2018.
Given the rising interest rates, the last thing markets needed to digest was a possible trade war. Instead of leaving a good thing alone, Trump’s felt inclined to monkey with the economy, passing tax reform Dec. 22, 2017, hoping to create incentives for U.S. and foreign businesses to move back to the States. Watching the Dow Jones Industrials, Nasdaq Composite and S&P 500 plummet in response to a possible trade war isn’t what investors needed, after February’s 3,200-point plunge. “Steel is just a tiny input in the U.S. Gross Domestic Product [GDP]—which is why it’s so crazy. You mess up your entire trading system for an industry that has a total of 80,000 jobs,” said Posen, noting the U.S. steel industry accounts for only 36,000 jobs or less that 1% of U.S. GDP. Posen sees industries hit by the tariffs account for over 6.5 mllion jobs or about 5% of U.S. GDP.
Reviving the U.S. steel, aluminum and coal industries at the expense of the U.S. economy makes no sense. Trump’s own Chief Economic Adviser Gary Kohn and Chairman of the Council of Economic advisors Kevin Hassett both oppose slapping tariffs on foreign steel and aluminum. Instead of seeking subsidies for the ailing steel and aluminum industries, Trump decided to go against his economic advisers to launch a trade war. While the U.S. only imports about 30% of its steel and aluminum, it still hurts the defense divisions of GM and Ford, both making tanks and armored personnel carriers. What’s beyond ironic, tariffs on foreign steel and aluminum hurts the Pentagon and American taxpayers by escalating prices of war materiel. “It’s time to stop pretending there was any sense at all,” said Posen. It’s all about giving a handout to particular U.S. steel and aluminum producers . . “ Posen said.
When you consider that sharp rise of the VIX [stock market volatility index] in the last month, markets needed more stability not chaos. “In national security terms, it makes no sense because it’s hitting our military allies like Western Europe, South Korea and Japan, and it doesn’t directly hit China. It’s a tax on consumers.” When you think the U.S. competes with Russian as a major arms supplier, raising prices on defense-related hardware only discourages foreign buyers. Raising defense-related prices only harms Pentagon sales across the globe, giving China and Russian more chance to win otherwise U.S. business. Defense Secretary James Mattis expressed concerns over what rising prices would do to Pentagon arms sales. Investment banks like Goldman Sachs and J.P. Morgan expressed concerns about how a trade war could impact the bottom line on the U.S. treasury.
If the European Union, China and Russia slap retaliatory tariffs on the U.S., it’s going to drive down global business in the U.S. Tariffs “are likely to escalate trade tensions,” said Goldman Sachs global investments. Tariffs can only have the effect of offsetting global business activity, creating havoc in world markets, leading more stock markets sell-offs. Markets react to threats to global business by profit-taking, transferring cash from stocks and into safe havens like bonds and precious metals. Tokyo-based financial services firm MUFG warned “if signs emerge of an escalation in trade tariff measures globally, it will prompt a dramatic deterioration in the current optimism over the outlook of global growth,” raising fears of recession. Trump’s tariff war panders to his base but does little to protect steel and aluminum workers, especially if he plunges the U.S. and global economy into recession.
