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Trump Trade

A welder fabricates a steel structure Monday at an iron works facility in Ottawa, Ontario. President Donald Trump insisted Monday that he's "not backing down" on his plan to impose stiff tariffs on imported steel and aluminum despite anxious warnings from House Speaker Paul Ryan and other congressional Republicans of a possible trade war.

Sean Kilpatrick, The Canadian Press via AP

On March 1, President Trump proposed a 25 percent tariff on steel and a 10 percent tariff on aluminum imported into the U.S. For decades, American steel and aluminum manufacturers have complained of unfair trade practices from other nations, who flood the market with cheap steel and aluminum at prices with which U.S. manufacturers simply can’t compete.

For Trump, America’s expanding trade deficit — the dollar value of goods and services we import from other nations being greater than what we export — combined with foreign protectionist policies and subsidies, has been a point of contention. In 2017, the U.S. trade deficit for goods and services was $566 billion, the largest since 2008. For goods only, the deficit was a massive $810 billion. China, our largest trading partner, accounted for 65 percent of this deficit, followed by Mexico, Japan, Germany and Canada as the top five largest contributors to our national deficit.

The U.S. is the world’s largest importer of steel and aluminum. Last year, the U.S. imported 27.5 percent of its steel and 90 percent of the aluminum it used. The largest exporter for steel and aluminum into the U.S. is Canada. Mexico is the fourth largest exporter of steel and the fifth largest exporter of aluminum into our country. Combined, they account for 32 percent of all steel and aluminum imported into the U.S.

A tariff is essentially a tax, and the goal of the proposed tariff is to offer an incentive to U.S. manufacturers to use domestically produced steel and aluminum by increasing the cost of foreign imports. Under the President’s proposal, if a manufacturer imports $1 million of steel, they now have to pay an additional $250,000 to the federal government. Not only does this increase the cost of steel and aluminum used to manufacture products, it also increases the purchase price to consumers. If costs get too high, consumers may scale back their purchases. Manufacturers may move their factories and operations overseas to better compete in the global marketplace.

Historically, tariffs tend to be targeted — on specific types of imports, against certain nations and for a limited number of years. But Trump’s proposed tariffs are quite broad-sweeping and include key U.S. allies. Also, they are expected to remain in effect for a long time. But what we don’t know, and what may significantly limit the impact, is whether the tariff is just on raw steel and aluminum that is imported, or if the tariff will attach itself to a finished product (a tractor component, car engine) manufactured with steel and aluminum overseas, and then imported into the U.S.

Some contend these punishing tariffs, along with heated rhetoric by the president, are a bargaining ploy to negotiate more favorable terms with Canada and Mexico on the NAFTA Treaty, the world’s largest trade agreement. The North American Free Trade Agreement, a tri-nation treaty between the U.S., Canada and Mexico, was established in 1994 for the purpose of eliminating trade barriers and promoting the tariff-free exchange of commerce. But Trump has threatened to withdraw the U.S. from NAFTA, which he contends is often unfavorable to American interests.

The President’s foray into tariffs is getting complicated. Republicans, who are largely free-trade and pro-business, are highly critical of the resulting economic consequences. On Tuesday, White House chief economic advisor Gary Cohn announced his resignation, though no specific date has been given. Cohn has advised against the tariffs and was a key architect of the recently passed corporate and personal tax cuts.

Trump is trying to revitalize the steel and aluminum industries he believes have carried the brunt of neglect in prior trade agreements. However, the number of companies and employees that use steel and aluminum is vastly greater than the number of companies and employees that manufacture steel and aluminum. Thus, it’s no surprise some of the most vocal opponents of the tariffs have come from America’s manufacturing heavyweights.

There is also the risk of retaliation. Do other nations start imposing tariffs on U.S. manufactured goods or agricultural commodities entering their country? The U.S. is one of the largest global exporters of corn and soybeans, and historically, these have been easy targets of retaliation.

Trump appears resolute in implementing the tariffs but has given himself flexibility in drafting the final order. However, he must be cautious of escalating a trade dispute into a trade war. Trade disputes are common in our globalized economy, but trade wars are actually quite rare, because in the end, no one wins and everyone loses.

Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.