Trump acted this week to set up tariffs on steel and aluminum. "It's not a trade war, it's a trade discussion", explained White House Economic Adviser Larry Kudlow. As in any chat process, first you have to grab the attention, I guess.
A 25% hike on imported steel is set to hit trade with Canada, Mexico, Brazil and South Korea specifically. Friend and foe, ally and enemy, all to be treated much the same. There is no ryhme or reason in Trump trade policy and certainly no alignment with foreign policy.
The US is the largest importer of steel in the world. In 2017, the US imported 35 million metric tonnes of steel, valued at around $30 billion dollars. Import penetration is around 33%. The largest exporters to the US were Canada (17%), Brazil (14%) , South Korea (10%) and Mexico (9%). NAFTA is under threat. The South Koreans and Japan (4%), must be baffled by Uncle Sam's tough love, at such a delicate time of nuanced talks with Pyongyang.
Russia (8%) and Turkey (6%) are next in line. Within the EU, Germany is the largest exporter to the US, accounting for 4% of overall imports. Despite all the fears of Chinese over capacity, imports into the USA are just 2% of total.
A 10% tariff was also imposed on aluminum products. Canada and Mexico are in the top five importers along with China and Russia. Can Trump really win a trade war? China, Japan, Germany, France and India are the largest importers of US white metal. Retaliatory tariffs will follow and damage exports from the US. Trade wars really are a zero sum game.
In the absence of domestic substitution, tariffs are inflationary. US domestic steel costs are up by 37% this year. The US faces the threat of retaliation. The White House is keen to defuse the tension. The day after Trump slapped tariffs on Canada, Mexico and the EU, Larry Kudlow framed the tenor or "trade talks between the US and other countries, as more of a family disagreement.
"No trade war ... more of a family disagreement"
Within the EU, the reaction was swift. "America First will be confronted by a Europe United". Europe United with the UK on the bench, perhaps. Cecilia Malmström the European trade commissioner claimed the US was playing a "dangerous game". There would be consequences for American customers. The global recovery could be damaged. Levi Jeans will cost more!
The EU has sent a formal complaint to the WTO. Retaliatory tariffs are likely to follow on Harley Davidson, Levi Jeans and Bourbon Whiskey.
"No easy riders for US exports".
No easy riders for US exports. The EU, along with China will target products and produce from the areas politically sensitive in the up coming mid term elections. Stock up on corn, orange juice and soya beans. It could get rough in the Mid West and the rust belt.
On balance, it has been a good week for Trump. The talks with Kim Jong-un are back on in Singapore. Tough issues on the agenda. Denuclearisation, plus the Americans have to find a way to pay for the North Korean trip. Staying at The Fullerton, a "magnificent neoclassical hotel on the mouth of the Singapore river", the cost of $6,000 dollars per night would rapidly exhaust the regimes foreign currency reserves.
No doubt the talks won't last too long. Kim Yong-un's security retinue would rack up $ one million per night alone! Peace in our time? Perhaps but probably not on the 12th June.
Good news on jobs in the USA. The unemployment rate fell to 3.8% in May. The economy created a further 233,000 jobs in the month. President Trump was unable to conceal his excitement. Breaking with protocol, established over many decades by Republicans and Democrats alike, Trump couldn't resist the tweet.
"Looking forward to seeing the employment numbers at 8:30 this morning"
The message was timed at 7:21 a.m. Within seconds of Trump's post, the dollar strengthened and Treasury yields rose. The jobs data will force the Fed to act in June. A rate rise is now inevitable this month. Unemployment at 3.8%, pay rising at 2.7%, inflation on the increase, expect at least one more increase, if not two, before the end of the year.
In the UK, the steel industry is ready for the worst. Britain exports around 350,000 tonnes of steel to the US, worth around £360 million. America is the second biggest export market. The EU is the largest.
Fears of a slowdown in US demand are overshadowed by the threat of Turkish exports, forced to find markets elsewhere. Turkish exports to the US, were worth around $1.5 billion dollars in 2017. Exports into the EU were up significantly in 2016. The UK fears more will come, if entry is denied into the USA.
The UK is hoping high value steel products will not be substituted any time soon in the US. The EU is taking a hard line with the Trump administration. An EU united will slam the "Easy Rider" products along with cranberrries, orange juice and American pie.
Theresa May adopted a more cautious line. Expressing "disappointment" with the "unjustified" decision to impose tariffs on steel and aluminum. Liam Fox was in agreement with the more cautious approach. A play on the special relationship perhaps ...
"Dear Donald, Liam and I are very disappointed with the decision to ..."
P.S. "Don't forget we have a special relationship" Love Theresa. Liam sends his regards.
Yep that should do it. That's all for this week, have a great weekend.
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.