Trade Turmoil: U.S. actions on steel and aluminum worry investors - J.P. Morgan Asset Management

Trade Turmoil: U.S. actions on steel and aluminum worry investors

Contributors Hannah Anderson, Global Markets Insights Strategy Team

In brief

  • The U.S. is actively pursuing protectionist trade policies, announcing tariffs on all steel and aluminum imports. This latest action should not come as a surprise as it is in line with previous comments from this administration on trade.
  • The announcement is a statement of policy intent, rather than the actual policy change in its final form. The actual implementation of this policy will take some time as the agency charged with enforcing it has said these tariffs are still under review.
  • The lack of detail makes the precise impact on markets uncertain. This announcement should serve as a reminder that an increase in protectionist policies represents a tail risk to the positive global economic outlook, but the impact will vary greatly across companies, sectors and countries.

What happened?

The White House announced it will apply a 25% tariff on steel and a 10% tariff on aluminum imports into the U.S. It is important to note that these tariffs are not official policy yet. The announcement, which investors should read more as a statement of intent, came from the White House, while the Commerce Department-the agency charged with actually implementing this policy-said it is still conducting a legal review of these measures.

Does the U.S. President have unilateral authority over trade policy?

In this case, yes. Section 232 of The Trade Expansion Act of 1962 gives the U.S. President the power to impose tariffs on the import of any product that the Commerce Department determines could threaten national security—i.e. foreign competition could put domestic producers of a material used in national defense, such as steel, out of business. Free trade agreements signed since 1962, as well as the U.S.’s participation in the World Trade Organization, complicate the implementation of Section 232 tariffs, but do not prevent their use. This means that challenges to these tariffs in international bodies—which the European Union has already announced it will pursue—will likely not alter U.S. policy.

Is this a radical shift in U.S. policy?

No. Protectionist measures regarding steel and aluminum have existed for quite some time already. The Bush administration enacted similar tariffs on steel imports in 2002 for 20 months. The long-run impact of this policy on the U.S. steel industry was muted, but it did raise input costs for many American manufacturers. Both international and domestic objections to those tariffs ultimately led to them being lifted earlier than planned. We do not expect this time will be any different, but it is too early and we lack too many details about the implementation to forecast the precise effect on the U.S. economy.

Investment implications

Asian investors are particularly concerned because much of the popular narrative around U.S. trade policy centers on challenging China. Any measure that could significantly harm China’s exports would dampen broader regional growth, given that China represents a huge source of demand. However, as with many of the other recently announced trade measures, the impact on China will likely be much less than feared by Asian investors or hoped for by U.S. policymakers. The U.S. imports over 4.5 times as much steel from Korea as it does from China, and the largest exporters of steel to the U.S. are actually close allies like Canada and European countries. U.S. companies will bear the brunt of this policy change as higher producer prices may tighten margins for the importer firms.

Investors are uneasy after February’s selloff, but the global growth environment remains robust and supportive of our positive outlook for Asian companies (see the recently released market bulletin “Asian equities: More room to run”). Trade tensions will remain elevated, likely raising volatility above recent years’ levels, but the risk of a market crash due to increased protectionism is still limited.

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