Tariffs on steel & aluminum

As of 3/2/2018, President Trump's planned tariffs on steel and aluminum - 25% and 10%, respectively raised fears of a potential trade war. Most global markets were down. Brazil and Canada would be affected more than China which has been criticized for product dumping (due to overcapacity) and huge trade deficit with us.

This article examines why we have a huge deficit with China and the consequences of a trade war.

Why huge trade deficit with China

The U.S. trade deficit with China was $375 billion in 2017.

·         The above figure is a little exaggerated. Using iPhone as an example, it is designed by Apple and assembled in China with components from many countries. The design cost is not included into the total cost and the cost of the phone is considered as the import cost. It applies to many products using China’s cheap labor.

·         A foreign country dumps the products to drive our companies out-of-business and then raises prices. So far, China has not raised prices in most products. Some said some Chinese steel products have lower cost than the component costs. Most likely the component costs are based in US, not in China.

·         We need to negotiate with China (or any country) to take out tariffs and trade barriers on our products.

·         Are we losing competitive edge in some sectors? It could be the victim of our own success. The workers have to be protected with regulations and higher wages, so is our environment.  Our debt is high as a percent of our GDP.

It could be due to our political system. The politicians do not plan anything longer than four years. They buy votes by satisfying the majority of voters. The tool is borrow more money. All these will reduce our competitive edge as our taxes are used for consumption (such as wars) instead of investing (such as building bridges).  

The consequences of a trade war

1.       China (Canada too) will retaliate or keep it low-key (as China still has a high trade deficit). They will target on the sectors that would make the loudest noise against the government. I would stay away from BA... for a while.

2.       Consumers will suffer. It is the invisible tax.

3.       The stock markets around the world will suffer.

4.       Some industries are less competitive globally. For example, EU companies can buy cheaper steel and aluminum without tariffs to produce products cheaper than us.

5.       China and other countries will withdraw our debts to them.

6.       Companies on aluminum and steel will make good money initially.

At the first sip of coffee, I can think of the above, so there should be more. It will not be good for global economies with excessive tariffs. The better actions is not excessive and ask China and other country to take out trade barriers for our products.

Most likely, the tariffs will be reduced and the affected countries will retaliate. The suffered sectors in US would voice their opposition and the tariff would be non-consequential. Both sides declare victory. Seen this many times.


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The above is from my book "Can China Say No?" from Amazon. Check March promotion for 0.99.