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We're inching closer to "war"...
Last week, President Donald Trump announced a plan to impose tariffs on steel and aluminum imports. He said the tariffs of 25% for steel and 10% for aluminum would apply "broadly" and "without quotas" to all U.S. trading partners.
Congressional Republicans and several members of Trump's own administration immediately opposed the proposal. This led many to believe that he would reconsider...
But then, Gary Cohn – the president's top economic adviser, and one of the plan's biggest critics – stepped down Wednesday. And it didn't take long for Trump to push forward...
He implemented the measures Thursday – though with one noticeable change. Initially, Trump said no countries would be exempt. That's no longer the case. From the Wall Street Journal...
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Nevertheless, Trump remains steadfast on his key campaign promise to "help" the steel industry. Now that the tariffs are official, we see a few reasons for concern...
First, the plan is unlikely to meet its objectives.
You see, Trump is right about one thing... The U.S. steel and aluminum industries have been decimated. Data from the American Iron and Steel Institute and the Aluminum Association show these two industries employ just 300,000 Americans in total today.
That's less than 0.1% of the U.S. population.
Tariffs or not, that's not likely to change anytime soon.
Despite the rhetoric, not all of these job losses can be blamed on outsourcing. Technology has played a significant role. For example, the U.S. steel industry has shed roughly 80% of its jobs since its peak in 1953. Yet, U.S. steel production has fallen by less than half from its peak.
Meanwhile, companies that have outsourced jobs still have little incentive to bring those jobs back. And it would take decades to rebuild that capacity even if they wanted to.
In other words, only a tiny number of Americans can possibly benefit, while the rest of us will bear the costs... And they could be significant.
Why? Because higher steel and aluminum prices don't just mean higher profits for the companies that produce these materials... they also mean higher costs for any companies that use these materials in production.
These companies have two choices: Take the hit to earnings, which could lead to job losses in other industries... or pass these costs on to consumers, in which case you can expect to pay more for items ranging from new cars and trucks to beer and canned goods.
In other words, these tariffs could ultimately be little more than "a tax hike the American people don't need and can't afford," as Utah Sen. Orrin Hatch put it on Monday.
That is bad enough... But the real risk is that these moves trigger a "trade war" – a vicious cycle where other countries retaliate with measures of their own. In fact, the European Union ("EU") is already preparing to enact its own tariffs on several U.S. products. As Bloomberg reported this week...
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And the fallout could be much worse... That's because China is also in the mix.
China's foreign minister, Wang Yi, said on Thursday that the country doesn't want a trade war, but that it would have to make a "justified and necessary response" if provoked.
But remember, China isn't just one of America's biggest trading partners... It's also one of the biggest holders of U.S. Treasury debt.
The federal deficit is expected to soar over the next few years. The Treasury will need to issue a ton of new debt. Meanwhile, the Federal Reserve – the largest buyer of Treasury debt over the past decade – is now selling.
Continued demand from large foreign buyers – led by China – will likely be critical to keep interest rates from soaring. China knows this, too... If push comes to shove, this situation could get ugly quickly.
We'll reserve judgment until all the details emerge...
But no matter how these events shake out, we expect greater volatility in the months ahead. Proper risk management is absolutely critical.
Be sure to have a trailing-stop loss or other well-defined exit strategy for every position you own... stick to reasonable position-sizing... and make sure some of your money is diversified into assets outside of the stock market.
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Regards,
Justin Brill
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