He actually did it. On Thursday, President Trump moved forward with his ridiculous plan to impose new steel and aluminum tariffs according to NPR. Unsurprisingly, countries across the world are reacting negatively. The EU and Asian countries are talking of either negotiating with Trump or imposing tariffs of their own, sparking fears of a trade war and an economic slowdown.
Potential fears of a trade war have caused stocks to slump, though we should expect stocks to rise again given the recent job report numbers that surpassed expectations. But how should investors react to the tariffs? The obvious answer may be to invest in U.S. steel manufacturers such as US Steel, but it is not that simple. Tariffs are an issue more complicated than “free trade good, protectionism bad,” and investors need to understand a few things before knowing what to do.
Why Now?
The first question to ask in any complicated situation is why. Why is Trump choosing to implement these tariffs now?
Trump has always been a protectionist going back to the 1980s when he was fearmongering about Japanese imports. Throughout his 2016 campaign, he railed against free trade agreements like NAFTA and the TPP, and has made plenty of noises of scrapping NAFTA if he cannot renegotiate to get a deal which benefits the U.S. more.
The fact that Trump exempted Canada and Mexico from the steel and aluminum tariffs could possibly indicate that these are a negotiating chip to get better terms from the two countries during NAFTA negotiations, and so this is one explanation for why the tariffs being implemented now. Unfortunately, the Trump administration’s lack of message discipline means that it is impossible to be certain of that explanation. It is possible that Trump did it on a whim to satisfy his staunchly nationalistic base and boost his poll numbers, or that he did it to distract the media from the ongoing investigations and scandals surrounding his administration.
However, the fact that Trump formally signed off the aluminum and steel tariffs, along with the resignation of economic advisor Gary Cohn, indicates that the tariffs are here to stay. Trump is notoriously flighty and willing to change his mind, but it is unlikely that he will go back on an initiative which he has had positive feelings towards for decades.
The Tariff’s Effects
While the tariffs are a sign that the Trump administration is serious about its protectionist rhetoric, we should not overestimate its immediate effects, whether positive or negative. In addition to exempting Canada and Mexico, Trump may grant exemptions to Australia and the EU depending on negotiations. China, which Trump has targeted with his protectionist rhetoric, only accounts for 2 percent of U.S. steel imports according to PolitiFact.
If Trump does not grant exemptions, the immediate result will be higher steel prices. This will hurt many U.S. companies that uses steel or aluminum products, including construction companies looking to sell house fast. This includes energy companies looking to construct pipelines, manufacturers, and construction companies to name a few categories.
Trump and his supporters will concede that the steel prices may harm the economy in the short term, but argue that the U.S. economy can handle it over the short term. In the long term, steel manufacturers will come back and employ American laborers, improving the general economy and reducing the American trade deficit. U.S. Steel’s announcement that they would be partially reopening a plant which would bring back 500 jobs has been trumpeted as proof that the tariffs will work. If this is correct, then investing in domestic manufacturers like U.S. Steel, whose financial numbers improved in 2017, would be a smart investment.
But there are a few problems with this theory. The steel industry cannot raise production overnight. It takes time to revamp and construct new mills as well as train the skilled workers needed to run said mills.
Any prospects of steel expansion would also have to be tempered by the fact that steel manufacturers cannot assume the tariffs will last. Trump could change his mind as unlikely as that would be, or he could be unseated in 2020. The prospect of a steel resurgence fueled by tariffs is unlikely, and investors should remember this before blindly investing in steel manufacturers.
What to Do
Given that Trump has already exempted two countries and could be expected to add more, the new tariffs as a whole will not be enough to drag down an economy which is still performing well. But even under these circumstances, investors should be more wary about dealing with industries which rely heavily on steel such as construction.
But while the tariffs are in and of themselves not a huge deal, investors need to pay close attention towards the possibility of retaliatory tariffs from Europe and other areas of the globe. Go over your portfolio, look at any businesses which depend heavily on overseas trade, and seriously consider whether they will remain good investments in a trade war. Neither the United States, the globe, nor you will win a trade war, and all many of us can do is be cautious and understand the effect of specific tariffs.