The Trump government has fired the opening shot in the trade war with three of its biggest trading partners by announcing levy of hefty tariffs on steel and aluminum imports from EU (European Union), Mexico, and Canada that will go into effect from Thursday midnight. Steel imports from these countries will be taxed at 25% and aluminum imports at 10%.
In Mar’18, Trump government has announced tariffs on steel and aluminum imports from all the countries at the rate of 25% and 10% respectively, exempting its key trade allies, EU, Mexico, and Canada for two months till 1 Jun’18.
While all the three countries were in talks with U.S. to seek exemptions from the tariffs, this move by the White House has set the stage for a round of tit-for-tat tariffs among some of the world’s largest economies.
The aggressive response of EU, Canada, and Mexico
As per the market reports, the targeted countries have responded almost immediately to the Trump’s aggressive decision. While Mexico announced that it will impose tariffs on American imports in retaliation, EU Trade Commissioner Cecilia Malmström said in a statement that Europe would “impose rebalancing measures,” likely meaning some kind of retaliatory tariff on U.S. imports, and take any other “necessary steps to protect the EU market.” Canada is expected to take its own measures.
The move by the U.S. and swift reaction from allies came after U.S. Commerce Secretary, Mr. Wilbur Ross said that the negotiations with the EU in recent months had gone nowhere and that discussions with Canada and Mexico to update the North American Free Trade Agreement were taking too long.
The likely consequences
The immediate impact of these tariffs will be mixed, but probably on net negative. U.S. steel and aluminum industries will now face less international competition, which means they’ll be hiring and producing more. However, the major impact will be seen in U.S.’s construction and manufacturing sector that will have increased raw material costs (aluminum and steel) in the absence of cheap imports.
The EU, Canada, and Mexico are the United States’ first-, third-, and fourth-largest trading partners. As per the market reports, while total U.S. trade with the EU last year was worth almost USD 720 billion, its trade with NAFTA (North American Free Trade Agreement) partners Canada and Mexico, which have become integrated into many US companies’ supply chains, was worth more than USD 1.1 trillion. Thus, while steel and aluminum tariffs alone aren’t the end of the world, trade war defined as the two sides getting locked in a cycle of retaliatory tariff increases — is.
A serious decline in trade between the U.S. and these three partners would do immense damage to the U.S. economy and create major consequences for the rest of the world. And even if we don’t get there, the tariffs are likely to do serious political damage to America’s relationship with its neighbours and most important European allies.
While Trump government has announced stiff aluminium and steel tariffs on all the countries, Argentina, Brazil, Australia, and South Korea are exempted from these levies. However, these exempted countries are imposed with quotas where a fixed quantity of steel and aluminium as decided by the Trump government can only be imported into U.S. from these countries.
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