Analysts from two of Australia's "big four" major banks said the Trump administration's news to lift temporary exemptions on tariffs for the EU, Canada and Mexico has stunned the market and appears to have backfired on the U.S. government.
Commonwealth Bank of Australia Mining and Energy Commodities Associate Director Vivek Dhar said U.S. President Donald Trump's original plan and the current situation are "looking like they will have a similar net impact," with higher tariffs compensating for the quotas on other countries.
He noted that the Trump administration's original tariff plan under Section 232 was a 7.7% tariff on every aluminum exporter to the U.S. Under the current situation revealed May 31, there will be 10% tariffs on every aluminium exporter to the U.S. except quotas, as previously arranged, for Australia, South Korea, Brazil and Argentina.
"Given the original tariff plan aimed to have U.S. add about 670,000 tonnes of aluminum (in order to boost U.S. capacity utilization to about 80%), a similar amount would likely be added under the current situation," Dhar told S&P Global Market Intelligence.
More importantly, the tariffs would equate to the U.S. turning away about 1% of global aluminum production.
"The net result is, therefore, higher U.S. aluminum prices, but weaker aluminum prices elsewhere. But realistically, the displacement of 670,000 tonnes of aluminum will likely be gradual, and the impact on markets outside of U.S. would be diluted by the large number of buyers. So prices outside of the U.S. may fall by a marginal amount."
Dhar said the move was a "surprise," but suspects the "aggressive" tariffs are likely to be a tactic to achieve a more favorable North American Free Trade Agreement deal, noting that U.S. Secretary of Commerce Wilbur Ross said he is looking forward to "continued negotiations" and potential "flexibility."
Yet this appears to have backfired, as on May 31 The Chicago Tribune quoted Luis de la Calle, a former undersecretary at Mexico's Ministry of Economy, as saying, "[T]he chances of a NAFTA renegotiation were slim, and now they are slimmer because of this. Successful negotiations require trust, and the question is whether we can trust the U.S. The answer appears to be no."
Competition concerns persist
That is not the only thing likely to backfire on the Trump administration.
ANZ Senior Commodity Strategist Daniel Hynes told S&P Global Market Intelligence that the move would make consumers suffer, both in the U.S. and outside the country.
"U.S. industry is relatively uncompetitive on a global scale, and the tariffs on imports, in all honesty, is going to struggle to make them any more competitive," Hynes said. "I suspect we'll see very little increase in U.S. output and capacity, which will essentially drive the international price up slightly in line with that 10% tariff. It's going to hurt consumers in the U.S. in particular, but certainly globally as well, so it will not have the desired effect Trump was trying to achieve."
He said the market had assumed the Trump administration's latest move was not going to eventuate due to the strategies used in the past.
"It did catch everyone by surprise, and does raise concerns that this could develop into something more impactful due to the retaliatory tariffs that we're likely to see from other countries," he said.
Moves have already been made on that front, with the EU saying it would take the U.S. to the World Trade Organization, while Canada hit back with tariffs on C$16.6 billion worth of U.S. goods.
Shares of Rio Tinto, whose British Columbia and Quebec smelters transport more than US$2 billion of aluminum to manufacturers in the U.S. annually, had dropped slightly by just over 1% during ASX trading June 1.
Rio Chairman Simon Thompson had told the miner's April 11 annual general meeting in London that it was "important for us that there was an exception made under Section 232 of the sanctions that those do not apply to Canada."
The company declined to comment on the Trump administration's latest decision.
