The S&P 500 fell 1.3% on 1 March, after President Trump announced his intention to impose a 25% tariff on steel imports and a 10% tariff on aluminum. By proposing blanket tariffs, Trump has opted for the harshest option recommended by the commerce department. The tariffs could hurt ongoing NAFTA discussions – Canada is the largest exporter of steel and aluminum to the US. And talk of retaliation has already begun, with the EU considering its own “safeguard” tariffs.
But we don’t believe Trump’s announcement significantly alters the positive outlook for global economic growth:
- The content of Trump's order has not been finalized, and the details will matter. Some countries may be excluded, reducing the impact of the tariffs.
- Steel and aluminum account for about 1.6% of US imports and about 0.2% of GDP. Even in their current headline form, the impact of the tariffs on aggregate inflation and demand should be negligible.
- Retaliation is likely to be targeted at politically sensitive goods, for example specific industries in US swing states. Such measures ahead of US mid-term elections might also prove effective in prompting an easing of the restrictions.
We are monitoring developments, as Trump’s latest announcement on trade is unlikely to be his last. This week’s annual report from the USTR specifically cited Chinese intellectual property violations as a potential subject for future US action. Escalation is a risk, however our base case is that Trump will impose one-off tariffs for the benefit of specific industries, and that this will not cause a full-blown international trade conflict.