Earlier today the U.S. administration announced that it had failed to reach an arrangement with Canada, Mexico, and the EU regarding steel and aluminum imports from these regions. Starting tomorrow, the U.S. will impose a 10% ad valorem (proportional to price) tariff on aluminum imports and a 25% ad valorem tariff on steel imports from these regions.
The U.S. administration announced that arrangements have been reached to limit steel imports from South Korea, Australia, Argentina, and Brazil. Similarly, Australia and Argentina arranged to limit aluminum exports to the U.S. As such, these countries will avoid the tariffs.
Steel and aluminum imports into the U.S. totaled US $52 billion last year, 2.2% of total goods imports, but only about 0.3% of total gross domestic product. In 2017, Canada exported $12.6 billion in steel and aluminum to the U.S., or about 24% of total U.S. imports. Mexico exported $3 billion (5.4%), and the EU $6.5 billion (12.4%).
The amount of trade affected is quite small. About 0.8% of annual Canadian output, 0.3% of Mexican output, and 0.04% of EU output is affected by these tariffs. As such, these tariffs are likely to have a very minor direct effect on economic activity, jobs, and consumer price inflation in these regions. However, there is a chance of a more outsized negative impact on economic activity if the imposition of these tariffs dents confidence and therefore results in the delay or cancellation of new investment in these regions.
Our past analysis assumed that the tariffs would have a muted direct impact on U.S. economic activity and inflation. But, these estimates assumed exemptions would persist for Canada, Mexico, and the EU. As a result, this morning’s announcement makes us more confident that while these tariffs are likely to have a limited impact on U.S. economic activity, they are likely to boost consumer price inflation by at least 0.1 percentage points this year and next.
Retaliatory Measures Promptly Announced
Although the direct impacts of the announced tariffs on the U.S. economy are anticipated to be small, equivalent tariffs announced by affected regions and the potential for further escalation could amplify the estimated drag on output and lift to consumer price inflation.
Retaliatory measures target a wide swath of U.S. exports. Mexico has announced “equivalent” tariffs on pork legs, apples, grapes, cheeses, and steel. Canada has responded by imposing surtaxes or similar trade-restrictive countermeasures on up to C$16.6 (US$12.6) billion of imports of steel, aluminum, and other products set to take effect on July 1st. Europe is likely to impose reciprocal tariffs on about €6.5 (US $7.7) billion of a variety of goods as early as mid-June.
Trade War Risk Looms Large
Today’s announcement that the U.S. administration will go ahead with steel and aluminum tariffs on its allies and largest trading partners is another sign that trade tensions are escalating. Last week the U.S. administration announced an investigation in automobile imports on national security grounds, and earlier this week it announced intentions to proceed with tariffs on up to $50 billion in Chinese technology imports in mid-June.
The probability of a cold trade war turning hot has now risen, but still remains a worst case scenario. The opportunity for dialog remains, and the U.S. administration appears to be using these tariffs to encourage progress in trade talks with its allies.
