Nina Adamenko

Market Commentary

For the week ending 09 March 2018
Report by Nina Adamenko
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Nina Adamenko


The issue of tariffs remained in focus this week. As reported last Thursday, President Trump was considering tariffs of as much as 25% on imported steel and 10% on aluminum, with the aim of protecting national security and pressuring China to reform its trade practices. The logic is somewhat controversial, given China provides a mere 3% of total US imports of steel products and will not be much affected by these measures. If the White House really wanted to cause China pain, it could have targeted a range of other industries, from electronics to shoes.

The data released on Thursday showed the trade surplus in China jumped from $20.3billion in January to $33.7billion in February. Although this is likely to be seasonal, the bigger picture is that while China’s trade surplus with most of the world has declined during the past year thanks to the stronger Chinese demand for commodities, its surplus with the US has continued to expand. In the meantime, US trade deficit rose to a nine-year high of $56.6billion in January. This increase was driven by a 1.3% decline in exports, whilst imports were practically unchanged.

The tariffs are being imposed by the President under a provision of US law that authorises them for the purpose of national security, bypassing Congress. That seems to be a smokescreen. US production of steel has been fairly stable for decades. The industry is not quite as “dead” as Trump claims. Making metals more expensive due to tariffs will hurt manufacturers and consumers a lot more than it will help producers. Construction, auto, energy, machinery and equipment industries will take the biggest hit. It will cause pain for US exporters too, as well as risk of destabilising the system of global trade.

Most of Trump’s cabinet opposes the idea, as does nearly every mainstream economist. It cost him one of his most valuable allies – Chief Economic Adviser Gary Cohn, the man behind the tax reform, who resigned on Tuesday after failing to derail the tariffs plan; but in Trump’s mind “trade wars are good, and easy to win.”

On Thursday more details emerged. The President pressed ahead with the imposition of tariffs, which will kick in in 15 days, but exempted Canada and Mexico at the outset (backtracking from earlier intentions to introduce tariffs for all countries). They would remain exempt if a new NAFTA (North America Free Trade Agreement) deal is reached and there is a possibility that other countries could be excluded too. Market reaction to these developments was pretty muted this week and the tariffs in their current form were judged to be toothless. Shares of most US steel companies were down from Monday to Thursday, while S&P 500 Index rose 1.8%, preparing to celebrate a nine year anniversary of the start of the greatest bull market on Friday.