The US decision to impose tariff on steel and aluminium by 25% and 10% respectively on Canada, Mexico and the EU is poised to trigger trade retaliation. Our focus will now be on China, which the US has indicated a 25% tariff on US$50bil of Chinese goods containing industrially significant technology.

Besides, our focus will also be on the US direction on NAFTA. The risk of the US adopting a more drastic move of withdrawing from NAFTA or imposing new tariffs on imported cars cannot be ruled out. Should that happen, the prospects for a near-term NAFTA deal will be seen fading. The impact on Malaysia is low, given our exports to the US is about 0.10mil metric tonnes of steel (see Table 1 on Malaysia steel companies with exposure to the US).

Meanwhile, we expect global markets to remain in a volatile mode in the near term. Apart from the trade war issues, the market will also be focusing on the coming FOMC meeting in June which we expect the Fed to raise rates by another 25bps. More importantly, it will be the tone of the Fed that will determine its policy rate hike aggressiveness. Also, the Italian crisis will continue to remain on the radar.

A. Knock-on effects on US industries

• The US has decided to impose tariffs on steel and aluminum on the EU, Canada and Mexico, thus ending the temporary exemptions. A 25% tariff on steel imports and a 10% tariff on aluminium imports would effective June 1. Though the move drew criticism from congressional Republicans, business groups and US allies, the US president still favoured the “America First” agenda as promised during his US presidency campaign.

• The argument on imposing the tariffs is to protect the US steel industry from foreign competition. The aim is to reduce US total imports of all steel products by 13.3mil metric tonnes or 37% of the estimated 2017 amount to 22.6mil tonnes.

• If we recall, former US President Bush slapped tariffs between 8% and 30% on imported steel in an attempt to revive the industry. The tariff was implemented on March 20, 2002 and ended on December 3, 2003. Canada was exempted but not the European Union (EU) which lashed back at the US with tariffs of its own after the World Trade Organization (WTO) deemed the US tariffs a violation of international trade agreements.

• Consequently, the Bush tariffs saw about 49% of steel-consuming firms experience difficulties in obtaining steel; 32% of manufacturers, including automakers and canneries, reported delays in production; while 19% of firms passed through price increases to customers. Employment in the sector generally was weak. The USD plunged around 15% although the sharp fall was not entirely due to the tariffs as there were other factors that undermined the currency during this period.

• The proposed tariffs on steel and aluminium of 25% and 10% respectively are expected to have some knock-on effects. Although the direct effect of tariffs could be low since steel and aluminium products account for just over 2% of overall imports, the knock-on impact on industries that use these products can be more significant based on the dynamics of the steel-consuming industries in US which are wide.

• Industries expected to be affected are those in the manufacturing such as fabricated metal products, machinery and equipment, transportation equipment and parts; chemical manufacturers; petroleum refiners and their contractors; tyre manufacturers; and non-residential construction companies. Small businesses which are price takers, implying they have no or little influence on the prices, will be the hardest hit.

B. Trade retaliation

• Trade retaliation is on the cards. Canada, the largest steel exporter to the US amounting to US$5.53bil in 2017, would impose US$6.6bil in tariffs starting July 1 on US steel, aluminum and a range of other US products. The US steel components will be taxed at 25%, while other goods, including aluminum, toilet paper, whisky and orange juice, will see tariffs of 10%. The tariffs will remain in place until the US drops its duties. This is the strongest trade action Canada has taken in the postwar era.

• The EU is also expected to retaliate. The trade deficit between the US and EU is around US$92bil. The EU will impose rebalancing measures and take steps to protect the EU market from trade diversion caused by these US restrictions with a possible target of US$3.3bil in tariffs which include iconic US products like Kentucky bourbon, jeans and Harley-Davidson motorcycles.

• Mexico, which exports US$2.93bil of steel, is also expected to impose tariffs on a wide range of US products, including steel products such as hot and cold foil, lamps, pork, sausages, apples, grapes, blueberries and various cheeses.

C. Potential worries

• Beyond the possible economic effects, we fear the US could indicate more drastic moves on trade such as withdrawing from the North American Free Trade Agreement (NAFTA) or imposing new tariffs on imported cars. Should that happen, the prospects for a near-term NAFTA deal will be seen fading.

• Also, Washington has taken aggressive new steps in its effort to reduce a US$337bil trade deficit with China, announcing that it will impose a 25% tariff on US$50bil of Chinese goods containing industrially significant technology.

D. Minimal impact on Malaysia

• Meanwhile, the impact on Malaysia is low. Our total exports of all steel products to the US in 2017 is around 0.3% which is equivalent to about 0.10mil metric tonnes. Table 1 below presents the Malaysian steel companies exports to the US.

E. Expect jitters in global market

• Meanwhile, we expect global markets to remain in a volatile mode in the near term. Apart from the trade war issues, the market will also be focusing on the coming FOMC meeting in June which we expect the Fed to raise rates by another 25bps. More importantly, it will be the tone of the Fed that will determine its policy rate hike aggressiveness. Also, the Italian crisis will continue to remain on the radar.

Source: AmInvest Research - 1 Jun 2018