Trump breaking supply chain eggs to make trade deal omelets

Who knew trade deal bargaining chips were made of steel and aluminum? Apparently, US President Donald Trump did.

Earlier this week Trump triumphantly defended his 25% global tariff on steel and 10% tariff on aluminum as key drivers in achieving recent trade deals for the leverage they provided.

He took on opponents of his tariff strategy, calling them "babies" as many were fearful of starting trade wars, alienating longtime allies, wrecking well-established supply chains and raising costs for steel-using industries and consumers alike.

Trump said the tariffs have been so successful he may not have to impose any new ones going forward -- simply threaten to impose them to reach new trade deals.

"Without tariffs, we wouldn't be talking about a deal," Trump said Monday while announcing the NAFTA-replacing US-Mexico-Canada Agreement (USMCA). "Just for those babies out there talking about tariffs. That includes Congress -- 'Oh please don't charge tariffs.' Without tariffs, we wouldn't be standing here."

Trump noted that the USMCA came on the heels of a new US trade deal with South Korea and the start of new trade negotiations with Japan. There were also bilateral steel-specific trade deals made with Brazil, Argentina and South Korea stemming from the 25% steel tariff established in March as a national security measure under the Section 232 trade provision.

Emboldened by his tariff strategy, Trump explained how it might apply to Japan in trade negotiations. "They told the previous administration, 'We're not going to negotiate.' I said, 'You don't have to negotiate, but we're going to put a very, very substantial tax on your cars if you don't,'" he said during a White House press briefing on the USMCA.

Meanwhile, US automakers have complained that the steel and aluminum tariffs will raise their 2018 costs by hundreds of millions of dollars.

The tariffs not only raised the price of foreign steel, but domestic steel as well, as American mills took advantage of reduced supply and uncertainty over imports to raise their prices.

Some smaller companies said they could go out of business without access to competitively priced foreign steel, including products not made in abundance by US mills. Affected US steel consumers can petition for exemptions to the tariffs, but there are difficulties there as well. As of October 1, the US Commerce Department  has received 35,962 exemption requests and  posted just 9,565 decisions: 6,339 granted and 3,226 denied.

Imports supply roughly 25% of the US market for finished steel and considerably more with the inclusion of semi-finished steel, which US mills themselves import.

Using tariffs to get trade deals suggests that with the trade deals in place, the tariffs might go away. But the Trump administration has insisted that is not the case. Commerce Secretary Wilbur Ross said this week the tariffs will not be traded off as part of the formation of the USMCA.

"There are problems specific to steel and aluminum relating to our national defense, and at this point of time, those stay the same," Ross told the Fox Business Network.

The interjection of "at this point in time" may be worrying to US steel and aluminum producers, but there have also been suggestions that protection for those industries could morph from tariffs to quotas, as was done in the bilateral steel trade deals that were negotiated in the wake of the 232 tariff implementation.

Trump himself addressed this possibility, saying the tariffs will remain in place for Mexico and Canada "until such time as we can do something that would be different -- like quotas perhaps -- so that our industry is protected."

On Tuesday, Mexican mill group Canacero said it was concerned about the hit Mexican steelmakers would take if the USMCA takes effect without the removal of the steel tariff.

"We must consider that during the first months of the Section 232 measures being applied, steel exports from Mexico to the United States have fallen by 30% on average, while the level of US shipments to Mexico has been maintained, increasing the strong deficit in steel that Mexico maintains with the United States," Canacero said in a statement.

One Mexican steel industry source told S&P Global Platts he was not keen on the idea of replacing the 25% tariff with a quota either. "Having quotas is also not legitimate while [being] trading partners," he said. "If a quota scheme is pursued, then we must act reciprocally."

US mills have praised the formation of the USMCA, "especially regarding measures that ensure North American steel continues to be used in automobile production," said the American Iron and Steel Institute, without addressing any concerns that the overall agreement could foster the alteration of the tariff protection, which has benefited domestic mills greatly.

Prices for US hot-rolled sheet, the steel industry's bellwether product, rose about 50% from roughly $600/short ton in May 2017, shortly after the Section 232 tariff investigation was launched, to roughly $900/st this summer. The Platts HRC assessment has been in the range of $844-$849/st this week. The 25% import tariff went into effect March 23 for most of the world. It was delayed for Canada and Mexico until June 1.

Nucor, the US' largest steelmaker, is expected to report third quarter net earnings of more than $700 million, after earning $1 billion in the first half. Nucor should easily top the $2 billion profit threshold for full-year 2018, with the outside chance of nearly doubling its $1.3 billion 2017 net profit. Nucor earned $796 million in 2016 and $358 million in 2015.