US President Donald Trump has announced that he is going to impose tariffs on import of steel and aluminum. This has seen the shares of US producers of these materials increase quite significantly. In our view if those tariffs become a reality, then there are a number of things that can happen.
Just looking at the initial step, this would mean that any products made from steel or aluminum will increase the price. The price will go up, even if the manufacturers manage to buy domestic instead of importing. The reason is very simple: The supply of US produced steel and aluminum will stay fairly the same but the demand increases. As a result the prices will go up. If tariffs stay in place for longer periods, then two main courses of actions are available to the consumers of those materials: They can use alternative materials. For example, instead of putting beer in an aluminum can, you could put it into a glass bottle. In other words: you replace it. The other option might be that the producers may increase their capacity. The problem with both of these options are that you can't change these over night. But both are definitely options to consider long term. Even if the producers increase the capacity the question remains, how many additional jobs does this really create? We would argue that it probably would be a very small number compared to the overall number of people who are in work already or are actively seeking employment.
Other businesses may have to increase prices because certain types of steel are not produced in the US at all. For example in car manufacturing you need special types of steel that need to be imported and are hard to replace with domestic materials.
Once the tariffs are in effect, there is a high likelihood that affected countries will retaliate. About 50% of the US steel exports go to Canada. That might not be much but Canada could impose the same tariff on those. It is also our understanding that Mexico has a trade deficit in terms of steel. Tariffs imposed by Mexico on US steel at the same level would potentially generate more money for Mexico than for the US. The European Union is an even more formidable opponent. They have already indicated that they have plans prepared to retaliate with import taxes on Harley-Davidson, Kentucky Whisky and other products that come from areas with a Republican majority. President Trump has already threatened to then impose tariffs on German cars. He has long questioned why the Europeans do not buy more US cars. Perhaps the question should really be: Why are US cars not as attractive as German cars despite a substantial price advantage? BMW, Mercedes, Audio: They are premium brands who can ask a premium price. Despite that, US citizens and US residents seem to have a preference for these over the US brands if they can afford it. It is unlikely that a German consumer will prefer a Chevrolet over a VW Golf any time soon.
The entire matter can certainly spiral out of control into an outright trade war. Perhaps it would make sense for the Europeans and Japanese to consider slapping tariffs on services and products from Google, Facebook, Microsoft, and other high-tech companies. And then take the money collected to give their own high-tech industry a tax credit. It just doesn't make sense. On a very simple, even trivial level, international distribution of work using market mechanisms benefits everyone. No-one would try growing pineapples in Alaska or Bananas in Europe. Equally there are industries that are better suited for other geographies. It makes sense to manufacture specialty steel at a massive scale near cheap energy to reduce costs. Arguing that putting tariffs on Canadian steel in the interest of "national security" doesn't make any sense. There is no record in the history books that the Canadians every attacked or threatened to attack the US. On the contrary: Canada is a partner in the five-eyes group of spying nations.
Let's hope that reason prevails in the long run. Paul Ryan, republican speaker of the house, has already broken with Donald Trump about the planned tariffs on steel and aluminum. There are more level-headed politicians that hopefully reign in a president who at times appears to act without thinking through the possible consequence of his actions.
Long-term investors have "survived" other presidents already. We will survive this president as well, no matter how good or bad he runs the United States. We just have to out-wait him. His term is limited to a maximum of 8 years, and that is only if he is reelected so it might be only 4 years. So stay calm and carry on!
Happy investing!
Other businesses may have to increase prices because certain types of steel are not produced in the US at all. For example in car manufacturing you need special types of steel that need to be imported and are hard to replace with domestic materials.
Once the tariffs are in effect, there is a high likelihood that affected countries will retaliate. About 50% of the US steel exports go to Canada. That might not be much but Canada could impose the same tariff on those. It is also our understanding that Mexico has a trade deficit in terms of steel. Tariffs imposed by Mexico on US steel at the same level would potentially generate more money for Mexico than for the US. The European Union is an even more formidable opponent. They have already indicated that they have plans prepared to retaliate with import taxes on Harley-Davidson, Kentucky Whisky and other products that come from areas with a Republican majority. President Trump has already threatened to then impose tariffs on German cars. He has long questioned why the Europeans do not buy more US cars. Perhaps the question should really be: Why are US cars not as attractive as German cars despite a substantial price advantage? BMW, Mercedes, Audio: They are premium brands who can ask a premium price. Despite that, US citizens and US residents seem to have a preference for these over the US brands if they can afford it. It is unlikely that a German consumer will prefer a Chevrolet over a VW Golf any time soon.
The entire matter can certainly spiral out of control into an outright trade war. Perhaps it would make sense for the Europeans and Japanese to consider slapping tariffs on services and products from Google, Facebook, Microsoft, and other high-tech companies. And then take the money collected to give their own high-tech industry a tax credit. It just doesn't make sense. On a very simple, even trivial level, international distribution of work using market mechanisms benefits everyone. No-one would try growing pineapples in Alaska or Bananas in Europe. Equally there are industries that are better suited for other geographies. It makes sense to manufacture specialty steel at a massive scale near cheap energy to reduce costs. Arguing that putting tariffs on Canadian steel in the interest of "national security" doesn't make any sense. There is no record in the history books that the Canadians every attacked or threatened to attack the US. On the contrary: Canada is a partner in the five-eyes group of spying nations.
Let's hope that reason prevails in the long run. Paul Ryan, republican speaker of the house, has already broken with Donald Trump about the planned tariffs on steel and aluminum. There are more level-headed politicians that hopefully reign in a president who at times appears to act without thinking through the possible consequence of his actions.
Long-term investors have "survived" other presidents already. We will survive this president as well, no matter how good or bad he runs the United States. We just have to out-wait him. His term is limited to a maximum of 8 years, and that is only if he is reelected so it might be only 4 years. So stay calm and carry on!
Happy investing!
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