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Global Trade at a Crossroads

On March 8, 2018, U.S. President Donald Trump approved the imposition of two new tariffs: 25% on steel and 10% on aluminum imports with Canada and Mexico exempted, effective March 23. Our latest series of research includes four articles which explore the possible impact of these tariffs on global trade.

U.S. States and Localities May Take Another Look at Budget Forecasts

In its 2018 sector outlook for U.S. states, S&P Global Ratings cited the potential for policy missteps as a leading risk to its baseline economic forecast for the year. President Trump's recent decision to impose import tariffs of 25% on steel and 10% on aluminum is an example of this type of risk. While the tariffs could help make the steel and aluminum produced by some U.S. firms more competitive relative to lower cost imports, on balance a shift toward protectionist trade policies has negative implications for most state economies.

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U.S. Steel and Aluminium Tariffs Raise Risk of Retaliatory Spiral

  • The net impact on the U.S. economy is likely to be very small. While steel and aluminum producers may benefit, aerospace and defense, capital goods, and midstream energy could suffer from higher input costs.
  • U.S. steel imports represent just 2% of global production. While aluminum represents a larger percentage (6%), its tariff is lower. Consequently, we do not see steel and aluminum that would have otherwise been bound for the U.S. flooding global markets.
  • Posing a greater threat is the risk of retaliatory action by major U.S. trade partners (e.g. EU, China) triggering a trade war, hurting American exporters, global trade, and global economic growth.

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U.S. Steel And Aluminum Tariffs Will Likely Have Small Direct Impact But Risk Larger Knock-On Effects

  • The direct impact of the new tariffs is likely going to be very small. It will likely boost U.S.-based steel and aluminum producers at the risk of downstream manufacturers.
  • The impact on consumer price inflation will be less than a tenth of a percentage point. The fear is that these tariffs are just a start to a longer game of tit-for-tat tariff retaliations and pose a fundamental threat to the rules-based trading system.
  • To the extent trade helps cut down inefficiencies and increase total factor productivity, loss in potential trade points to further deterioration in the longer-run trend of productivity growth.

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Trump Tariffs Forge Better Credit Quality For U.S.-Based Steel And Aluminum Producers With A Protectionist Stance

  • Trade actions could underpin positive rating actions among U.S.-based steel and aluminum producers.
  • Low-speculative-grade rated issuers have the best prospects for higher ratings in the next 12-24 months.
  • Trade barriers will likely widen spreads with global prices and increase margins. Elevated prices could support stronger profits and cash flow, and boost refinancing of looming maturities.

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