Is International Trade Suffering?
The United States confirms import duties on steel and aluminium from Europe, Canada and Mexico.
After two months of uncertainty, the US authorities finally took a tougher stand on 31 May by confirming the end of the exemption for the 25% and 10% import duties on steel and aluminium respectively from the European Union, Canada and Mexico, in a bid to scale back imports and ramp up the country's utilisation rate. While South Korea, Brazil and Australia were quick to accept the trade concessions in exchange for the exemption of these taxes, Europe, Canada and Mexico are keeping a firmer rhetoric towards the US.
Through these protectionist measures, President Trump clearly wants to put pressure on his trade partners. He has numerous motives. Firstly, Donald Trump is in a hurry to produce visible political results in the run-up to the mid-term elections in November. Secondly, the ongoing renegotiations of NAFTA agreements (free trade agreement with Canada and Mexico) are gridlocked. Finally, it appears that President Trump is planning to take the US out of the World Trade Organization—the guarantor of multilateral international trade—and negotiate accords on a country by country basis, which he deems preferable.
President Trump's decision raises several questions.
The announcement itself will not hamper global economic growth, which remains strong. We forecast 3% growth in 2018 in the US and 2.2% in Europe. The effects of this measure will be limited given the small weight of the activities concerned. In Europe, they represent a mere 1% of economic activity (every year the EU exports 5 million tonnes of steel and aluminium to the United States).
The macroeconomic environment remains supportive for the steel sector. The Chinese economy is in good shape, companies in the sector are optimistic about the future thanks to a synchronised growth momentum in all geographical regions. This good momentum is reflected in the order books of industry players. Steel prices are also at high levels.
The impact on individual companies in the affected industries will depend on their exports to the United States, but also on the location of their production centres. Some companies, particularly European ones, will avoid import duties by producing on US soil. In theory, US companies will have an advantage (higher steel prices, softer competition), except those with factories in Mexico.
The implementation of these import duties is an essential issue: where will production of steel and aluminium (usually destined for the United States) take place now, i.e. in which regions? Europe has already launched a safeguard investigation in response to the restrictions of American steel and aluminium in March. The procedure may lead to the implementation of import duties or quotas that will protect EU producers against excessive imports, if necessary. The system for the surveillance of steel imports has revealed a surge in imports of certain iron and steel products. This trend could increase now that access to the US market is limited. A new shift to Europe could disrupt the European market, feeding through to prices.
The difficult (potentially confrontational) negotiations between countries, coupled with a series of potential retaliatory measures, may increase the risk of protectionism, leading to a contraction in trade. This topic was on the agenda of the G7 summit that took place in Quebec, Canada, on 8-9 June in a difficult context. One of the stumbling blocks was the question of import duties. Moreover, the possible expansion of protectionist measures to other sectors of the economy is worrisome. President Trump has pursued his plan on the trade front by conducting an investigation on imported vehicles. His objective is likely to maintain the pressure in the renegotiation of NAFTA agreements (the origin of imported cars is a crucial issue in the negotiations). Germany and Japan, both with a large presence in the US, are also directly concerned, with respectively 25 million and 50 million vehicles exported to the United States every year. Once again, only manufacturers with production sites in the United States will avoid import duties and therefore avoid the negative effects on their profits.
In conclusion, it is very difficult to give an accurate estimate of the consequences of the known protectionist measures, mainly on account of the political dimension of the topic. If international trade relations do not deteriorate, our scenario of solid growth coupled with a sustained appetite for pro-cyclical stocks should continue to support the good stock market performance in the materials sector, which has been particularly resilient to protectionist announcements of late. We are cautious on the automobile sector (regulations, sales cycle, protectionism, valuation). See a related publication