'Neat political theater': US treads lightly with tariffs over inflation concerns

US tariffs on a host of Russian metal products introduced in February imposed some punitive new fees, but the government's action is largely symbolic as it avoids targeting the imports most valuable to US companies.

US President Joe Biden announced a sweeping set of tariffs on over 100 Russian metals, minerals and chemical products in a presidential proclamation on Feb. 24, the anniversary of Russia's invasion of Ukraine. The list of targeted goods includes metals like aluminum, specific types of iron and nonalloy steel products, and refined lead, according to an analysis by S&P Global Commodity Insights of the 8-digit HS codes the US published in relation to the Feb. 24 trade measures.

Many of the tariffs build on existing trade measures announced in a June 2022 proclamation, doubling tariff rates to 70% from 35%, while others set new 35% and 70% thresholds. For Russian aluminum alone, the February announcement set a 200% tariff. But the US imports relatively little Russian aluminum, rendering the tariff more of a political gesture than a major economic blow, according to trade experts.

The administration is avoiding trade restrictions on higher-value US imports from Russia that could fuel inflation, said Marc Busch, a professor at Georgetown University who has advised the US on trade barriers.

The February tariffs do not appear to target palladium or potash, for example, and only four of last year's top 20 imports from Russia by value look to be affected by the latest sanctions, according to a Commodity Insights analysis.

"All said and done, it's neat political theater, and that's about it. ... When you take all of these efforts, in total, there's a lot of heterogeneity with respect to that which is serious and that which is kind of make believe," said Busch. "And the symbolism is going to have to be balanced against the obvious inflationary pressures that come along with certain moves, given how many manufacturing sectors are dependent upon these inputs."

It is a balancing act that may soon get easier. Since the start of the war, US manufacturers have begun developing new supply chains that avoid Russian materials, and the increasing pace of that scale-up could pave the way for more substantive tariffs, experts said.

Careful choices

The value of the goods imported from Russia that appear to be subject to the new tariffs is relatively low compared to unaffected materials.

Of last year's top 20 US imports from Russia, the four products that appear to be targeted by the February proclamations were valued at $1.26 billion, or 10.6% of the total $11.84 billion for all top 20 imports, according to S&P Global Market Intelligence data.

In comparison, the US does not appear to have targeted palladium, which was its top Russian metal import in 2022 at $1.35 billion. That exceeded the combined value of all four sanctioned products on the top 20 list, where palladium was the second-largest import by value.

Palladium is crucial in car manufacturing, where it is used in catalytic converters, which remove pollution from vehicle emissions. Russia was responsible for 40% of global palladium production in 2021.

Similarly, the US did not appear to target potassium chloride, a fertilizer also known as potash. At $518.5 million, potash was the fifth-largest US import from Russia in 2022.

The White House and the US Trade Representative did not respond to inquiries seeking comment and additional information about the tariffs.

Shrinking Russia exposure

Since the conflict in Ukraine began, opponents of Russia's invasion have taken steps to curb their dependence on Russia for goods, including metals.

"The thing that's amazing, and that we would never have said a year ago, is that at different levels, 100% of these metals are replaceable," said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management. "In fact, it took Putin's threat to help develop markets to scale elsewhere. And they still have more to go."

Overall, Russia's metals and mining exports have dropped since the conflict began and end users have turned to substitutes like swapping palladium with platinum amid the supply chain shifts. Previous sanctions on Russian aluminum have also helped to prepare supply chains for the rapid changes in response to the invasion.

With other markets stepping up to backfill lost material from Russia, the Biden administration could impose penalties on more important Russian imports without risking severe economic damage elsewhere, said Steven Tian, research director of the Yale Chief Executive Leadership Institute, which is tracking companies cutting ties with Russia.

"The overarching perspective here is that policymakers don't realize just how much room for maneuver they now have," said Tian. "The commodity supply and demand dynamics have changed dramatically since last year. ... We're now at a point in the global economic cycle where policymakers have a lot more room to be aggressive with targeting Russian supply."

While the latest sanctions did not target top imports like palladium and potash, the US' willingness and ability to expand sanctions to Russian aluminum, among other materials, without creating market turmoil suggests that policymakers may be gaining confidence in applying pressure on Putin, Tian said.

"It's obviously the biggest single concern," Tian said, referring to fears of stoking inflation and constraining US supply chains.

Georgetown University's Busch held a similar view, noting that the Biden administration had to tread carefully in designing the latest round of sanctions to avoid fueling inflation and market disruption. The administration may also want to reserve some Russian imports for tougher trade measures, in case it decides to ratchet up pressure on Putin in the future.

Still, the latest trade measures will force manufacturers who buy products with increased tariffs to reevaluate supply chains and look for cheaper alternatives. This is especially true for aluminum, given that the 200% tariffs on the metal are set to apply to imported goods from all countries that contain aluminum smelted in Russia starting April 10, Busch said.

"It's going to be a serious headache for countless American businesses that are going to have to figure this out for themselves," Busch said.

A bonus for some US companies

For US metals producers, more stringent tariffs could be a boon to domestic manufacturing.

"Primary metal manufacturing continues to decline as consumer demand slows and consumers shift spending away from goods to services," said Abbey Omodunbi, vice president and senior economist at PNC Financial Services Group. "The implementation of the non-aluminum tariffs combined with China's reopening will likely provide a lift to US manufacturing in the near term."

US aluminum and steel companies appeared to back the moves. Kevin Dempsey, president and CEO of the American Iron and Steel Institute, a trade association, said the group "supports the president's recent action."

Likewise, US-based aluminum producer Alcoa Corp. said it "welcomes the imposition of tariffs."

United Company RUSAL International Public Joint-Stock Co., the Russia-based aluminum giant, did not respond to a request for comment.

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