De-globalization is the concept which gained momentum after BREXIT event. Trump's decision to impose tariffs of 25% & 10% on steel and aluminum import will add to de-globalization talk. US, under Trump, has pulled out of Trans Pacific Agreement and started negotiating NAFTA. Global trade has started diverting from path of multilateral trade pact to plurilateral trade pact.
Imposing of tariff by Trump, in direction of US first policy, is likely to hurt US and other economies involved in related trade with Uncle Sam. Canada, Brazil, EU, China, Russia, UAE are the major countries who are indulged in trade of both the commodities. Automobile and construction industry consumes close to 65-70% of US steel demand. According to an article published in Reuters, an average US vehicle consumes 1-1.2 ton of steel .US steel production cost is in between $825-875 per ton. If we consider, imported steel cost in between $650-750, 25% import tariff may add $150-180 to the vehicle's cost. Apart from steel, aluminum is also used in automobile which is also likely add to production cost. US imports close to 7 million tons of Aluminum as local production is not capable of supplying to US demand. Canada is the major supplier of both Aluminium and steel to US, which is already rattled by NAFTA negotiations. Retaliatory actions have been warned by EU, China and Canada. EU has prepared list of products, $3.5 billion worth of trade, on which 25% import duty will be infused, in case Trump move ahead with the plan.
US consumers are likely to get impacted as consumer surplus will be diverted to government’s tax kitty because it is highly unlikely that exporting economies will reduce rate in order to be competitive. US industries like automobile, aviation, construction, aluminium packaging will face the brunt of increased raw material cost and impact on sales. US is already burdened by twin deficit and require foreign capital to bridge the gap. Corporate tax cut will likely to add $300 billion deficit over next 2 years. China and Japan holds more than 50 % of foreign capital participation in US treasury. Treasury war is one of the retaliatory reaction which affected countries can choose. This scenario of dumping US bonds is highly unlikely as it will eventually hurt treasury holding countries remaining bond portfolio .
Higher cost of final goods will hurt savings of US consumers. US steel and aluminium industry are more capital intensive. So automaton will add profit to manufactures bottomline and employment won't be benefitted much. Employment in industry ,dependent on commodities as raw material ,will be impacted if US consumers don't loose purse to shell out extra greenbacks. Inflationary pressure will be seen if US consumers continue purchasing at same pace. Treasury yields can rise due to inflationary pressure, faster pace of interest rate hike and impacted countries resorting to treasury war. In last 2 instances of tariff hike in 1995 and 2002, greenback saw depreciation in value, though it was accompanied by other reasons also. Last few housing and construction data were showing reluctance of first time buyers due to higher prices of single family home which rose by more than 5% in 2017. 30 years mortgage rate is hovering @4.3% which is near to 5 year high. Increased cost of construction and pressure on treasury yield (in turn impacting mortgage yield) will increase risk of slump in housing sector.
USD should initially depreciate against global currencies, if Trump goes ahead with planned tariff hike. Gradually, divergence in central banks policy will make US treasury more relevant to investors seeking low risk decent return investment and help greenback to win lost ground.
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