The US government has made good its threat, and will be imposing tariffs on steel and aluminium imports from the EU, Canada and Mexico with effect from tomorrow. If the burgeoning trade conflict were to stop there, the repercussions would be very limited. However, there is now a very real danger that global trade will be seriously dragged down by a spiral of tariffs and countermeasures.
The US is the world’s largest importer of steel – its volume of steel imports dwarfs the equivalent export figure by a multiple of around four. Global steel production capacity has risen to 2.4 billion metric tonnes in recent years, which represents an increase of 127% on capacity back in 2000. At the same time, demand for steel has increased at a much slower pace, with the result that a huge capacity surplus now hangs over the global steel market (approx. 700 million metric tons, or seven times the annual consumption of the US). US steel producers – just like many European producers – can hardly turn a profit in such an environment. A key driver of this excess capacity is Chinese steel production, as China produces as much steel in an average month as US producers do in a year.
In Germany, just 42 million tonnes of steel was produced last year, of which around a million tonnes was exported to the US. The direct consequences of this latest development for the few remaining German and European steel producers – some of which are represented in the DAX (ThyssenKrupp) and in the broad Euro Stoxx (Arcelor Mittal) – are therefore likely to be manageable, with no repercussions expected at overall market level. However, European steel producers will continue to find themselves confronted with a “flood of steel” from abroad, which is likely to be the more serious of the two problems. Indeed, the pressure can be expected to intensify, as it is likely that foreign producers will reroute a proportion of their production originally designated for the US market to Europe instead, which will in all likelihood lead to persistent price pressure in the European steel market. At the same time, the steel industry is a very labour-intensive business, which means that more jobs could be axed at any time.
Following on from the punitive tariffs on washing machines and solar panels, the imposition of steel tariffs represents a continuation of Trump’s “America First” policy, which is intended to protect US companies against unwelcome competition from abroad. This policy is actually damaging to all parties involved – not least the US consumer, as it is likely that companies will transfer their rising input costs to end prices.
The rising tide of protectionism is toxic for the global economy. In the event of the EU following through with its threat and likewise slapping tariffs on US goods as a countermeasure, there is a serious risk of the global economy being abruptly derailed from its growth trajectory, with the corresponding negative consequences for equity markets.