The US Commerce Department is recommending new steel and aluminum import tariffs and quotas, offering President Trump three paths of varying scope and severity for each case. China, the world's top steel and aluminum maker, and South Korea have been quick to threaten retaliation. The exchange raises the threat of escalating trade tensions.
But we see only limited chances this will devolve into a full blown, multilateral trade war:
- Familiar territory: The second Bush administration enacted similar measures on steel products in 2002. While academic studies suggested this was damaging to US job creation, it did not spill over into a broader trade conflict and the measures lasted only three years. World Bank data showed no evidence that these targeted measures halted the expansion of global trade, which actually rose from 25.4% of world GDP in 2002 to 30.6% in 2008.
- Bark versus bite: So far, Trump's measures on trade have fallen far short of his campaign threat to impose across-the-board tariffs of up to 45% on Chinese imports and 35% on Mexican imports. Commerce Secretary Ross has argued for a more targeted approach that would limit harm to US trade allies.
So the chances of broader protectionist measures, which could spark a damaging, multi-lateral trade conflict, remain limited to 10–20%, in our view. These proposals may instead represent an early salvo in a limited Sino-US trade war, with a more important decision pending on Chinese intellectual property violations. Robust international trade adds to synchronized global growth, and we remain overweight global equities. We will be monitoring next week’s NAFTA negotiations.
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