US metal tariffs, reprisals to have limited impact on global growth, says Fitch

Retaliatory actions over the recent US’s expanded steel and aluminum tariffs on imports from the EU, Canada, and Mexico could escalate trade tensions but the situation would need to deteriorate severely to have major ramifications for world GDP, according to Fitch Ratings.

The foremost rating agency said US iron, steel, and aluminum imports equate to 0.3% of US GDP so in isolation tariffs are unlikely to have a large effect on global or regional economic growth, adding that the immediate impact on US inflation will also be limited unless a trade war escalates significantly.

Last week, the US introduced tariffs of 25 percent on steel and 10 percent on aluminum imports from the EU, Canada, and Mexico, following the expiration of a waiver.

Canada, the EU, and Mexico represented 16 percent, 15 percent, and 9 percent of US steel imports, respectively, in 2017 according to the US Census Bureau. Since March, tariffs have been in place on imports from most countries on these metals. Australia, Argentina, Brazil and South Korea were exempted following bilateral trade negotiations.

The US steel industry stands to benefit from expanded tariffs, given less competition from cheaper imports and supportive pricing, due to Chinese capacity cuts and healthy demand. Demand destruction is not anticipated in the near term, given a favorable economic backdrop characterized by solid business spending, construction activity, and low unemployment. Moreover, capacity expansion within the US is currently not expected.

Canada is viewed as more vulnerable in a trade war than the US, given Canada’s greater dependence on the US for trade. Effective July, Canada plans retaliatory tariffs on C$16.6 billion of US goods, which affects 5 percent of goods imported from the US, inclusive of a reciprocal tariff on steel and a 10 percent tariff on items including certain food products and whiskey. Mexico is launching a World Trade Organization dispute and retaliatory tariffs on US pork, produce, and steel. During 2017, 32 percent of US pork exports went to Mexico, per the US Department of Agriculture.

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The EU has confirmed retaliatory tariffs of up to 25 percent. Tariffs will be implemented in two stages on products including motorcycles, whiskey and sweet corn in response to US measures which affect EUR6.4 billion of EU exports. In July, tariffs will be applied to US products valued at up to EUR2.8 billion and within three years on products worth EUR3.6 billion.

Fitch says the direct impact of US tariffs on the EU steel and aluminum industries should be limited, as exports to the US represent 3 percent of total steel and aluminum production. Nonetheless, the diversion of metals previously shipped to the US to the EU could create oversupply and domestic pricing pressure. The focus of the EU steel industry has been to secure protective tariffs on imports into the EU. We believe it likely such measures would be introduced.

“Sector-level effects of higher metal prices in the US depend on product level exemptions and when supply contracts reprice. US industries using significant steel include construction, diversified manufacturing and automotive. We anticipate most companies will attempt to pass on higher costs to customers but certain industries, such as auto manufacturing, could have less flexibility and may use cost reductions to offset the margin impact,” Fitch said.

Companies with limited foreign production and meaningful international sales are more exposed to retaliatory actions. During 2017, 27 percent of Brown-Forman’s net alcohol sales were from Europe and 16 percent of Harley-Davidson’s motorcycle unit sales were from EMEA (primarily Europe). Conversely, trade risk for US agricultural processors and protein companies is viewed as manageable, given most firms have a well-established and diversified asset base and/or risk management practices that provide flexibility to adjust to evolving trade policies.