The Great American Tariff War
President Trump always seemed to have a protectionist agenda. However, recently he shook the world with his decision to impose a tariff on metal imports. He is of the opinion that metal production was one of Americas fortes. He also believes that other countries have used unfair trade laws and policies to make Americas metal production less competitive.
At the present moment, America imports more than half of its steel. It also imports a whopping 90% of the aluminum which is used by American industries. Donald Trump wants to change this. As a result, he has levied a tariff of 25% and 10% on steel and aluminum respectively. Donald Trump is justifying the imposition of these tariffs by citing the strategic nature of these industries. Laws enacted during the Cold War period mandate that the United States should be in control of its metal production. This is because, in the absence of such facilities, United States may not be able to ramp up its metal production in the event of an external aggression.
Trump argues that the imposition of these tariffs was necessary. He also believes that these tariffs will improve the condition of the economy. The market does not seem to agree. The Dow Jones Industrial Average crashed more than 500 points as soon as the news of this tariff imposition was known. In this article, lets have a closer look at how the imposition of these tariffs will impact the different sectors of the American economy.
The Problem with These Tariffs
President Trump is not a big fan of China and its policies. China is the number one exporter of steel and aluminum to the United States. Hence, Donald Trump wants to punish China by imposing tariffs and making it difficult for them to dump their steel into the United States. The problem is that China is not the only country that exports these metals to the United States. Canada, Brazil, Russia and South Korea are the other major suppliers of steel and aluminum. Countries like Canada are viewing this act as being aggressive. For centuries, the United States and Canada have maintained cordial trade relationships. However, this unprovoked imposition of tariffs has created pressure on the Canadian government to retaliate with the imposition of tariffs on American goods being imported into Canada. The resultant trade war will not create an outcome which will be favorable to the United States. Even if it wins the war, it would have ended up alienating an ally.
The Automobile and Aerospace Industries
The automobile, as well as aerospace industries in the United States, are well developed. They provide employment to about 2.5 million people. These industries are going to be the worst hit because of Trumps tariff imposition. Steel and aluminum are the major inputs used in these industries. If the price of these raw materials increases, the end result will be a domino effect and the price of the final products will go up as well. The problem is that this will hurt the competitiveness of these companies globally. Consider the case of Boeing which will have to work with inflated raw material costs. However, its competitor Airbus is based in Europe and will have access to cheaper imported raw materials. The same would be the case for companies like General Motors and Ford automobiles. The Trump administration is already preventing these companies from locating their plants to low-cost locations such as Mexico. Trumps policies are proving to be detrimental to these industries as of now. Also, the American consumer will not be better off since they will end up paying inflated prices.
Construction and Real Estate
Steel is a metal that has varied applications. Consider the case of real estate, where steel is used to build beams and columns. A rise in the price of steel will make construction work more expensive. This move can jeopardize the future of an industry where seven million people are employed.
Also, many other industries utilize steel. Consider the case of the oil and gas industry. A lot of refining equipment is made from steel. Also, steel is used as the final product to lay pipelines which are used to transport oil. An increase in the price of steel will add up to the cost of oil. Since oil is used to transport all goods, this inflated price of oil will lead to price inflation in the entire economy.
The Final Impact
Donald Trump is hopeful that the imposition of these tariffs will end up creating more jobs in the United States itself. He knows that there is going to be some degree of consumer inflation. However, it will not be as much as the critics claim it will be. This is because aluminum and steel are raw materials. Even if they account for a quarter of the value of each product, a 10% rise in their price translates to a 2.5% increase in the price of the overall product. Donald Trump believes that the final inflation will be even less and given the number of new jobs created, the American economy will be better off with steel that has been domestically produced.
To sum it up, Donald Trump has started a trade war. The reaction of the other nations is yet to be seen. However, it is likely to isolate the United States.
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