Di Michael Salice, Director of Research, Sky Harbor Capital Management
The Trump administration announced it would not extend steel and aluminum tariff exemptions for the European Union, Canada, and Mexico, subjecting US allies that supply over 40% of the nation’s imported metals to duties originally levied in March. The move was somewhat anticipated by the EU following failed attempts to establish quotas, but more surprising for Canada and Mexico given ongoing NAFTA negotiations. Retaliatory measures were announced almost immediately by the affected nations and target American steel, aluminum, food, consumer, and agricultural products.
The tariffs, which benefit US primary steel and aluminum producers, come at the expense of downstream metal consumers, whose input costs could rise. But the directly impacted sectors are relatively small in size. Steel and aluminum’s share of total imports appears modest (~ 1.6%), the sectors employ relatively few workers and the impact on industrial production is limited. As such, despite the expectation of higher steel and aluminum prices in the near term, these measures are not likely to meaningfully contribute to inflationary pressures, or vastly alter the pace of US economic growth.
Longer term, we see some chance of economic harm arising from downstream margin compression and reciprocal tariffs. Consumers of steel and aluminum should undoubtedly face higher costs, although the restart of idled domestic capacity should buffer some of the move. As a result, any economic growth arising from higher domestic steel and aluminum output should be largely offset by reduced income – and, potentially, diminished consumption and investment – stemming from higher prices to downstream users.
The retaliatory moves are difficult to handicap and do little to alleviate already elevated trade war concerns. However, we view these recent developments as primarily a negotiating tactic by the administration, with compromise remaining the most likely outcome.